- The copper-to-gold price ratio is at its lowest point in 50 years
- Copper is significantly undervalued compared to gold, per Jefferies
- Gold's price strength is driven by geopolitical risks and central bank buying
The copper-to-gold price ratio has fallen to its lowest point in the last five decades, trading more than two standard deviations below its historical mean.
This extreme discount, with copper priced exceptionally cheaply relative to gold, has led Jefferies to note that some degree of mean reversion is inevitable, and the fundamental drivers for this correction are likely to come from the copper side of the equation.
The Extreme Discount and Outlook
Jefferies notes that the ratio of the copper price to the gold price is at a 50-year low. This historical anomaly strongly suggests that copper is currently undervalued when priced in gold terms.
The implication is a bullish outlook for copper, driven by its underlying market dynamics, which are expected to narrow this valuation gap.
The Dynamics Behind the Divergence
The Copper: Gold ratio serves as a key indicator, reflecting the relative strength of different economic factors influencing each metal.
What Drives the Ratio Down?
The current low ratio reflects the strength of factors typically influential for gold, such as the elevated geopolitical risk, the current US fiscal situation and the sustained global central bank gold buying.
Gold's price has been notably strong, rising over 50% year-to-date, partly due to its unique status as a speculative hedge against currency debasement.
The Copper Catalyst
The ratio is currently less sensitive to traditional copper drivers, such as global economic growth and the strength of emerging markets.
Since the ratio already strips out major inverse correlations like the US Dollar's strength and general inflation impacts, Jefferies anticipates that the correction or mean reversion, will be fundamentally driven by a future reassertion of copper's demand drivers.
Jefferies maintains the view that copper is trading at an extreme discount when priced in gold, making the probability of a copper-led reversion exceptionally high.
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