Copper is the new Gold

The price of copper has once again breached $10,000 a tonne. This is significant, the copper price is often considered a proxy for global growth, and it has only ever breached this level a handful of times, most recently in March. The question now is, will the price be able to stay at this level, and what does it mean for other asset classes.

The break above this psychological level in copper comes at the same time as Anglo American announced a deal with Teck Resources earlier this week, which will make one of the world’s largest copper producers. This timing of this deal is not accidental, it suggests that the world is going crazy for copper, and they want a (big) sluice of the pie.

The deal news has helped to keep momentum high for copper, however one of the key drivers has been supply constraints. Chile’s Codelco, the world’s largest state owned copper miner, is warning that national production could stagnate at about 5.5 million tonnes per year as the industry is facing mounting challenges including deeper mining operations, falling ore grades and rising costs.

This comes at an interesting juncture for the global economy. As supply remains stuck, demand is surging. This is due to two factors, firstly the the transition to cleaner energy, and secondly, AI demand for electricity, copper is an excellent conductor of electricity, is also experiencing exponential demand growth.  

As you can see in the chart below, over the last 5 years the copper price has traded sideways. This opens the door to a prolonged rally for the copper price if the gains above $10,000 can be sustained.

Chart 1: 5-year Copper price, London Metal Exchange

Source: XTB and Bloomberg

There is also another driver of the copper price: gold. The ratio between copper and gold is at record low, as you can see below. Investors have ploughed into gold as a store of value in the face of geopolitical fears and as the Fed is set to embark on a rapid pace of interest rate cuts. This could be copper’s turn to play catch up. In the months ahead, copper may trade like a precious metal since it is an integral part of the AI trade, which has been on fire in recent months.

Interestingly, when the copper/ gold ratio is at record lows, this is far from a warning that a recession could be on the cards. Instead, it can be positive for risk, as you can see in the chart below. The S&P 500 has an inverse correlation to the copper/ gold ratio, and the rally in US stocks could be well placed to continue.

Chart 2: The Copper/Gold ratio and the S&P 500 (yellow line)

Source: XTB and Bloomberg