Tuesday, March 11, 2014

Copper Prices: Macro Economic Indicator

The price of copper has long been a macroeconomic barometer.  Some old market veterans that I have spoken with even claim that it is the most important indicator of economic activity that we have.  Copper is a crucially important commodity around the globe and is used in countless industrial applications.  It is primary used to make electrical wires, construction materials, and industrial machinery.  An element that is used in all of these applications tells a lot about the pace of industrial production.  When the demand for Copper is high we know that economies are ramping up. Conversely when demand is mild, we can assume that economic output may slow down.  There is much academic debate about how long of a delay there is between supply and demand changes for Copper and changes in economic output.  Let us consider the following chart:
Since February 2012 there has been quite a dramatic divergence between the price of copper (blue) and the S&P 500 index.  The correlation between these two is not perfect, but I think it is significant enough to merit closer consideration.  If you look at a more recent price chart, you will see that the price of copper has declined dramatically since February's monthly close of  $3.19.
Definitely worthy of closer consideration!  Possibly another canary in the coal-mine.