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Traditionally, gold (NYSE:GLD) and copper (NYSE: JJC) had an inverse trading relationship. Like all things in finance over the long term, that made sense due to the efficiency of the market. Gold is an asset that is bought almost entirely for speculative purposes as it has very little industrial usage. Copper, by contrast, is deployed almost entirely for building and commercial purposes such as piping, cable, and wiring, among others. When economic conditions are bearish, gold soars and copper struggles. When economic conditions are bullish, it is The Red Metal that surges in value.
But as the chart below reveals, the JJC and the GLD have been following in a co-relationship. The Yellow Metal should be soaring due to global economic weakness and recent economic stimulus measures from central bankers. Europe is in a recession, Japan is in the 23rd year of its “Lost Decade,” recovery from The Great Recession is anemic in the United States, and economic growth is declining in China, India and other emerging market countries.
To counter that economic environment, global central bankers have been running the printing presses in overdrive with economic stimulus measures. Fiat currencies have been issued in massive amounts without any corresponding economic growth. This combination of a low economic growth and high massive quantities of paper money should have the GLD soaring. As the chart below shows, however, it has been declining since it peaked in early October, shortly after Federal Reserve Chairman Ben Bernanke initiated Quantitative Easing III.
What has fallen from its high from the same period is the JJC. The exchange traded fund peaked in late September, after China initiated its $156 billion stimulus program. As with so many other commodities, China is the world’s largest consumer of copper (about 40%). Since its stimulus program is concentrated on infrastructure projects, the demand for copper is expected to soar. As a result, traders piled into The Red Metal after Beijing’s announcement.
Both gold and copper are up again, but for different reasons. Bullish economic data from China has The Red Metal more in demand. Naturally, the price rose. Due to the incredibly irresponsible response by Washington, DC to The Fiscal Cliff, gold jumped in price. There are now reports of another downgrade ahead for the United States, which makes The Yellow Metal more attractive to traders. Leading gold broker, Bullionvault.com is also bullish on the long term prospect of gold along with many other analysts such as Cardwell RSI Edge, which expects the run to last way into 2013.
While that explains the short term movements in gold and copper that have mirrored each other, the long term trajectory that is the same moves to the beat of a different drummer. Due to the flood of liquidity from central bankers in the United States, Europe, Japan and China, the traditional trading patterns for copper and gold have been destroyed.
In the initial rounds of economic stimulus, known as “quantitative easing,” gold and copper moved as before. After the announcements by Bernanke for Quantitative Easing I and II, gold, copper, oil, and silver would soar as the US Dollar fell. But the trillions of dollars and other currencies unleashed eventually overwhelmed what the financial markets could deploy to counter the onslaught of paper money by gobbling up commodities.
As a result, the only financial instruments with the depth to absorb all the newly created capital were the government bond markets, particularly those for US Treasuries. That is why the interest rates are so low for US Government debt even though Washington has failed in economic leadership again, is in danger of being downgraded, and will be adding trillions more to its national debt well into the future with tremendous unfunded liabilities for social programs.
The easy money in trading gold and copper has been made. Many speculators have lost heavily due to the breakdown in the traditional relationships. Paradoxically, the future for both gold and copper is bullish. For The Red Metal, it is positive as China has been registering better economic data, and has over $3 trillion in foreign reserves to engender domestic growth. The Yellow Metal will surge in the future due to the inability and/or refusal of the world’s central bankers to responsibly deal with the dire economic situations at home.
This article was written by Marcus Holland from FinancialTrading.com.