Copper prices decline amid doubts about China’s stimulus impact

Key points

• Copper prices have given back around half of the China stimulus gains, as traders increasingly question the scale and impact of these announcements
• The gold-to-silver ratio has slumped to a 2020 low, as traders weigh growth expectations against general market risk sentiment
• The short-term outlook depends on stimulus news from China, as well as market speculation about the timing, speed, and depth of US rate cuts

Over the past month, a number of economic policy easing measures in China have been announced, primarily through support for the housing market and the banking sector, and, while the initial positive reaction helped drive the Chinese stock market as well as China-dependent commodities such as copper and iron ore sharply higher, more than half of those gains have now been reversed, with traders increasingly questioning the scale and the pace of the announced initiatives. While there has been a clear shift in policy to support a 5% growth target, these rallies increasingly look like dead cat bounces unless fiscal policy shifts more directly to support consumption, which, together with underwater property prices, remain two key factors preventing the Chinese economy from growing at the targeted pace.

The precious and industrial metal sectors have witnessed mixed fortunes this year, with precious metals racing to a 30% gain while industrial metals have returned 8%. However, together with strength in softs like coffee and sugar, these two sectors have supported a year-to-date gain in the Bloomberg Commodity Total Return Index of 4%, thereby offsetting losses across oversupplied energy and grains sectors.

The gold-to-copper ratio is a financial metric that reflects the relative strength of gold and copper. In this example, we use LME copper, currently trading around USD 9,450 per ton. It provides insights into various economic conditions, including inflation, growth expectations, and general market risk sentiment. The year-long rally in gold and recent correction in copper have seen the ratio slump to 3.52, a level last seen in 2020 during the pandemic, when copper prices temporarily slumped, and gold received a boost amid stimulus-led inflation concerns.

Prior to that, the ratio was only this weak in the aftermath of the financial crisis in 2008 when recession and inflation concerns for a short while drove the two metals in opposite directions. Although copper has increasingly become a China demand story, given the fact some 50% of global supply is consumed in China, the falling ratio is nevertheless signalling potential economic distress and a general high level of uncertainty. The latter is supporting gold, given the current focus on fiscal profligacy, safe-havens, geopolitical tensions, de-dollarisation, the US election, and incoming rate cuts lowering the cost of holding bullion for investment purposes.

Based purely on the current direction of travel, the ratio may fall below 3 before finding support, and at unchanged gold or copper prices it would indication a move either in gold to USD 3000 or copper to USD 8000.