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#40 S2N: Great Copper Trading Signal

#40 S2N: Great Copper Trading Signal

Michael Berman, Ph.D.
April 12, 2024

No Spotlight, just Observations today

I am going to share this all the same, even though I have run out of time. I wanted to highlight the traps of falling for something that looks promising on the surface, but if one doesn’t do their homework, it is very easy to fall into the trap of believing there is a signal when, in fact, there is just some random fit.

The strategy is one I replicated based on reading something about trading the ratio of copper to gold around a ratio threshold. As you can see visually, the buy signals look very promising. Next week, I will update you on whether this is actually as good as it looks.

Gold and silver are having an amazing run of things at the moment, with gold making new all-time highs and silver finally making new 52-week highs as well. Silver is in fact leading gold this year; see the table of performance below. However, as you can see in the chart below, silver is still a very long way from its previous all-time highs. We live in a world that is so myopic that I don’t think many of today’s traders have even seen a long-term chart of silver. Perhaps bitcoin has robbed it of demand.

A lot of market commentators are talking about the divergence in performance between the SP500 and 10-year bond prices. You can see that over the last year or so, there has been a divergence.

The question I always ask is: What does the pattern look like over a decent length of time, and does a breakdown in the relationship make sense?

I am a bit confused, as bonds and equities have always been considered negatively correlated. I did a very quick analysis on only 25 years of data, and the correlation is, as I thought, negatively correlated (-0.34). I think all the fuss is a nothingburger; we have just become accustomed to a certain belief because of the secular bull bond market over the last 40+ years. More divergences make more sense to me going forward.

Here is one last chart to end the week with. I have shared it before. The 2-year US Treasury is far better at calling short-term rates than any Fed Chairman. It has made a few false starts in the last year or so, but if yields continue to climb like they are doing now, then the next move the Fed will be making is a hike, not a cut- ouch!