What is Copper Telling about The Future Price of Gold?

Things happen for a reason, which is why the exchange traded fund for copper (JJC) has been surging as the exchange traded fund for gold (GLD) has been plunging.

Copper, The Red Metal, is used almost exclusively for industrial purposes.  Cables, pipes, wires, etc… all require copper.  By contrast, The Yellow Metal goes almost entirely for investment or costume usage.  There is very little industrial demand for gold.  A major reason for that is the high price, as The Yellow Metal has a number of very attractive features.

Due to this contrast in end use, copper and gold have traditionally had an inverse trading relationship.  When an economy is growing, there is a tremendous demand for copper.  Based on that need by home builders and factories, the price of copper rises.

But when an economy is weak, confidence is lost in the fiat currency for that nation.  As a result, the demand for gold as a safe haven asset rises.  From that, the price of gold increases.

As the chart below shows, the GLD has been falling since the November presidential election in the United States.  Filings by hedge funds reveal that major investors such as George Soros have been dumping the GLD.

By contrast, the JJC is up for the past week, month, quarter, and six months of market action.  Year to date, the JJC has risen by 2.70%, with the GLD down by 2.27% for the same period…almost a mirror image of the price trajectory for each metal!

Gold has been trading sideways for almost the past year and one-half.  Even more bearish for The Yellow Metal is the lack of physical demand and the declining volume.  The price for a futures contract is now down to under $1610.00 an ounce.  What makes this even more negative for gold bulls is that 2012 was the biggest year for central bank buying of The Yellow Metal in the past five decades.

While this could be a short-term dip in the price of gold, the bullish run for copper does not confirm that view.  The chart below clearly shows that gold has been testing lower support levels.  The way gold is trending, the crucial psychological level of $1600.00 could be penetrated soon.  That could very easily take the price of The Yellow Metal much lower as it is completely supported by speculative buying due to the lack of industrial demand.