{"id":25550,"date":"2021-05-01T05:33:02","date_gmt":"2021-05-01T05:33:02","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=25550"},"modified":"2021-05-03T01:44:36","modified_gmt":"2021-05-03T01:44:36","slug":"gold-and-copper-towards-a-new-measuring-stick","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2021\/05\/01\/gold-and-copper-towards-a-new-measuring-stick\/","title":{"rendered":"Gold and Copper: Towards a new measuring stick"},"content":{"rendered":"

Our old measuring stick, the Dollar, is broken and no longer fit-for-purpose. The Fed and other major central banks have consistently eroded the value of their national currencies through quantitative easing; expanding their balance sheets by 580% \u2014 from $5T to $29T \u2014 over the past 14 years, as the chart from Ed Yardeni below shows.<\/p>\n

\"Total<\/p>\n

Currency debasement is easily hidden from view by simultaneous policies across central banks, affecting all major currencies.<\/p>\n

Gold as a benchmark<\/h3>\n

Attempts to use Gold as an independent benchmark are frequently interfered with by government attempts to suppress the Gold price, dating back to the London Gold Pool<\/a> of the early 1960s. Alan Greenspan even went so far as to base Fed monetary policy on Gold, not so much to suppress the Gold price but as an early warning of inflation (measured inflation figures are lagged and therefore useless in setting proactive monetary policy). The result was similar, however, suppressing fluctuations in the Gold price.<\/p>\n

A new benchmark<\/h3>\n

Earlier than Greenspan, Paul Volcker had used a benchmark based on a whole basket of commodities to measure inflation.<\/p>\n

Our goal is derive a similar but simpler benchmark that can be applied to measure performance across a wide range of asset classes.<\/p>\n

Copper and other industrial metals, on their own, are not a viable alternative because demand tends to fluctuate with the global economic cycle.<\/p>\n

Gold and Silver also tend to fluctuate but their cyclical fluctuations, especially Gold, tend to run counter to industrial metals. Demand for Gold is driven by safe haven demand which tends to be highest when the global economy contracts.<\/p>\n

We therefore selected Gold and Copper as the two components of our benchmark because their fluctuations tend to offset each other, providing a smoother and more reliable measure. A mix of 5 troy ounces of Gold and 1 metric ton of Copper<\/b> provides a fairly even long-term balance between the two components as illustrated by the chart below. The middle line is our new benchmark.<\/p>\n

\"5<\/p>\n

Copper (red) leads in times of inflation, when industrial demand is expanding rapidly, while Gold (yellow) leads in times of deflation, when the global economy contracts.<\/p>\n

First, let’s address the weaknesses. China’s entry to the World Trade Organization (WTO) in the early 2000s, a once-in-a-century event, caused a surge in the price of both Copper and Gold. The change drove up commodity prices but drove down prices of finished goods; so we are undecided whether this is truly inflationary.<\/p>\n

The sharp fall in 2008, however, is accurately depicted as a massive deflationary shock, caused by private debt deleveraging during the global financial crisis (GFC). Central banks then intervened with balance sheet expansion (QE). Accompanied by fiscal stimulus, QE caused a huge inflationary spike lasting from 2009 to 2011.<\/p>\n

\"5<\/p>\n

Fed expansion paused in 2011-2012 and was followed by a sharp contraction by the European Central Bank (ECB), causing deflation, as the breakdown from Ed Yardeni below shows. The ECB then reversed course \u2014 following Mario Draghi’s<\/a> now famous “whatever it takes” \u2014 and, accompanied by the Bank of Japan (BOJ), engaged in another rapid expansion.<\/p>\n

\"Total<\/p>\n

The Fed attempted to unwind their balance sheet in 2018-19, causing a brief deflationary episode before all hell broke loose in September 2019 with the repo crisis<\/a>. Fed balance sheet expansion in late 2019 was, however, dwarfed by the expansion across all major central banks during the pandemic. Fed QE caused a sharp spike in the M2 money supply as well as in our Gold-Copper index (GCI), warning of strong inflation.<\/p>\n

\"GCI<\/p>\n

Market Values using our GCI benchmark<\/h3>\n

While not as high as some valuation measures (PE or Market Cap\/GDP), plotting the Wilshire 5000 Total Market Index against the GCI shows stocks trading at levels only exceeded during the 1999-2000 Dotcom bubble.<\/p>\n

\"Wilshire<\/p>\n

The Case-Shiller Index plotted against GCI shows home prices are relatively low in real terms, most of the froth being created by a shrinking Dollar.<\/p>\n

\"Case<\/p>\n

But if you think housing is cheap \u2014 after the China-shock \u2014 look what happened to wages.<\/p>\n

\"Average<\/p>\n

Precious Metals<\/h3>\n

Plotting Gold against the GCI might seem counter-intuitive but it highlights, quite effectively, periods when Gold is highly-priced relative to its historic norm. The yellow metal retreated to within its normal trading range in March 2021.<\/p>\n

\"Gold\/GCI\"<\/p>\n

The plot against GCI offers far less distortion than the Gold-Oil ratio below.<\/p>\n

\"Gold\/Brent<\/p>\n

We only have 4 years of data for Silver (on FRED). Plotting against GCI warns that silver is highly-priced at present but we will need to source more data before drawing any conclusions.<\/p>\n

\"Silver\/GCI\"<\/p>\n

Conclusion<\/h2>\n

Stock prices are high and overdue for a major correction but this is only likely to occur when: (a) government stimulus slows; and\/or (b) the Fed tapers its Treasury purchases, allowing long-term Treasury yields to rise. Market indications \u2014 and dissenting voices (Robert Kaplan) at the Fed \u2014 suggest that the taper could occur sooner than Jay Powell would have us believe.<\/p>\n

The Gold-Copper index (GCI) warns of strong inflation ahead, which should be good for both commodities and precious metals. But bad for stocks and bonds.<\/p>\n","protected":false},"excerpt":{"rendered":"

Our old measuring stick, the Dollar, is broken and no longer fit-for-purpose. The Fed and other major central banks have consistently eroded the value of their national currencies through quantitative easing; expanding their balance sheets by 580% \u2014 from $5T to $29T \u2014 over the past 14 years, as the chart from Ed Yardeni below … <\/p>\n

Continue reading “Gold and Copper: Towards a new measuring stick”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,13],"tags":[4845,4839,4838,1578,4837,1587,4820,3124,4430],"class_list":["post-25550","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-inflation-economy","tag-average-hourly-manufacturing-earnings","tag-case-shiller-us-home-price-index","tag-gci","tag-gold-2","tag-gold-copper-index","tag-gold-oil-ratio","tag-m2-money-stock","tag-silver-2","tag-wilshire-5000"],"yoast_head":"\nGold and Copper: Towards a new measuring stick - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Gold and Copper: Towards a new measuring stick - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Our old measuring stick, the Dollar, is broken and no longer fit-for-purpose. The Fed and other major central banks have consistently eroded the value of their national currencies through quantitative easing; expanding their balance sheets by 580% \u2014 from $5T to $29T \u2014 over the past 14 years, as the chart from Ed Yardeni below … Continue reading "Gold and Copper: Towards a new measuring stick"\" \/>\n<meta property=\"og:url\" content=\"https:\/\/thepatientinvestor.com\/index.php\/2021\/05\/01\/gold-and-copper-towards-a-new-measuring-stick\/\" \/>\n<meta property=\"og:site_name\" content=\"the patient investor\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/profile.php?id=61572934660810\" \/>\n<meta property=\"article:author\" content=\"https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/\" \/>\n<meta property=\"article:published_time\" content=\"2021-05-01T05:33:02+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2021-05-03T01:44:36+00:00\" \/>\n<meta property=\"og:image\" content=\"http:\/\/static.incrediblecharts.com\/images\/2021\/2021-04-30-cbassets.png\" \/>\n<meta name=\"author\" content=\"Colin Twiggs\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Colin Twiggs\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"4 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2021\/05\/01\/gold-and-copper-towards-a-new-measuring-stick\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2021\/05\/01\/gold-and-copper-towards-a-new-measuring-stick\/\"},\"author\":{\"name\":\"Colin Twiggs\",\"@id\":\"https:\/\/thepatientinvestor.com\/#\/schema\/person\/d42b18d516a80149d739845749ac6454\"},\"headline\":\"Gold and Copper: Towards a new measuring stick\",\"datePublished\":\"2021-05-01T05:33:02+00:00\",\"dateModified\":\"2021-05-03T01:44:36+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2021\/05\/01\/gold-and-copper-towards-a-new-measuring-stick\/\"},\"wordCount\":832,\"publisher\":{\"@id\":\"https:\/\/thepatientinvestor.com\/#organization\"},\"image\":{\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2021\/05\/01\/gold-and-copper-towards-a-new-measuring-stick\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.incrediblecharts.com\/images\/2021\/2021-04-30-cbassets.png\",\"keywords\":[\"Average Hourly Manufacturing Earnings\",\"Case Shiller US Home Price Index\",\"GCI\",\"Gold\",\"Gold-Copper Index\",\"Gold-Oil Ratio\",\"M2 Money Stock\",\"silver\",\"Wilshire 5000\"],\"articleSection\":[\"Banks & Interest Rates\",\"Inflation\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2021\/05\/01\/gold-and-copper-towards-a-new-measuring-stick\/\",\"url\":\"https:\/\/thepatientinvestor.com\/index.php\/2021\/05\/01\/gold-and-copper-towards-a-new-measuring-stick\/\",\"name\":\"Gold and Copper: Towards a new measuring stick - 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He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters. Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008\/2009 and 2020 bear markets well ahead of actual events. He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-6E6","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":21284,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/08\/19\/sp-500-makes-new-high-or-dollar-at-new-low\/","url_meta":{"origin":25550,"position":0},"title":"S&P 500 makes new high or Dollar at new low?","author":"Colin Twiggs","date":"August 19, 2020","format":false,"excerpt":"The S&P 500 closed at a new record high of 3389.78 yesterday. Or did it? Another way of looking at it is the Dollar has fallen to new lows. That is not yet evident on the Dollar Index, which compares the Dollar to other major currencies. DXY is testing long-term\u2026","rel":"","context":"In "Commodities"","block_context":{"text":"Commodities","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/gold-commodities\/commodities-gold-commodities\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":6595,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/01\/28\/is-gold-really-undervalued\/","url_meta":{"origin":25550,"position":1},"title":"Is gold really undervalued?","author":"Colin Twiggs","date":"January 28, 2013","format":false,"excerpt":"I agree with James Turk that gold is a currency. It does not generate income and is simply a store of value. Demand for gold will rise in times of uncertainty and when fiat currencies, against which it is traded, are being debased by central bank balance sheet expansion. Now\u2026","rel":"","context":"In "Gold & Commodities"","block_context":{"text":"Gold & Commodities","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/gold-commodities\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":23448,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/12\/31\/markets-that-are-likely-to-outperform-in-2021\/","url_meta":{"origin":25550,"position":2},"title":"Markets that are likely to outperform in 2021","author":"Colin Twiggs","date":"December 31, 2020","format":false,"excerpt":"There is no reliable benchmark for assessing performance of different markets (stocks, bonds, precious metals, commodities, etc.) since central banks have flooded financial markets with more than $8 trillion in freshly printed currency since the start of 2020. The chart below from Ed Yardeni shows total assets of the five\u2026","rel":"","context":"In "Australia & NZ"","block_context":{"text":"Australia & NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":53380,"url":"https:\/\/thepatientinvestor.com\/index.php\/2024\/05\/25\/in-gold-we-trust\/","url_meta":{"origin":25550,"position":3},"title":"In Gold we Trust","author":"Colin Twiggs","date":"May 25, 2024","format":false,"excerpt":"Rising demand for gold and silver reflect the failure of central banks to maintain price stability and efficient functioning of credit markets. Private investor mistrust of fiat currencies was historically an emerging market problem, with countries like India and China holding large private savings in the form of precious metals\u2026","rel":"","context":"In "China & HK"","block_context":{"text":"China & HK","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/china-hk\/"},"img":{"alt_text":"S&P 500","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-05-24-spx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-05-24-spx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-05-24-spx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":61783,"url":"https:\/\/thepatientinvestor.com\/index.php\/2025\/05\/26\/money-is-gold-and-nothing-else\/","url_meta":{"origin":25550,"position":4},"title":"Money is gold, and nothing else","author":"Colin Twiggs","date":"May 26, 2025","format":false,"excerpt":"The phrase comes from J.P. Morgan's testimony to Congress in 1912, which is often misquoted as: Gold is money. Everything else is credit. The great financier testified before a Congressional subcommittee in the Pujo hearings, investigating an alleged money trust. In his testimony, he drew a distinction between money and\u2026","rel":"","context":"In "Gold & Precious Metals"","block_context":{"text":"Gold & Precious Metals","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/gold-commodities\/gold-precious-metals\/"},"img":{"alt_text":"CPI Purchasing Power","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-05-26-cpi-purchasingpower.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-05-26-cpi-purchasingpower.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-05-26-cpi-purchasingpower.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":24403,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/03\/06\/the-rising-dollar-versus-gold-silver\/","url_meta":{"origin":25550,"position":5},"title":"The rising Dollar versus Gold & Silver","author":"Colin Twiggs","date":"March 6, 2021","format":false,"excerpt":"The Dollar Index rallied off support between 89 and 90. Penetration of its descending trendline indicates a test of resistance at 94. China's Yuan is also testing support at 15.4 US cents. Breach would warn of a correction. The Dollar has been acting out of character since 2019. Gold and\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/25550","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=25550"}],"version-history":[{"count":5,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/25550\/revisions"}],"predecessor-version":[{"id":25586,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/25550\/revisions\/25586"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=25550"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=25550"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=25550"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}