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If The Gold/Copper Ratio Is Truly A Harbinger Of Market Weakness, Here Are Some Pair Trade Ideas

Tyler Durden's picture




 

Two days ago we pointed out the dramatic change in the ratio of copper to gold, which moved at the highest rate of change since June of 2010. Today, the rate of change is even higher at 4.3%. And with copper starting to seriously take on water, a curious observation emerges: is the gold-copper ratio, which on an inverted basis was virtually a tick for tick correlation conjugate for the S&P, now simply a harbinger of where the stock market is headed. All else equal, once the Chinese exuberance dynamics which appear to have stalled out in copper, move to equities (which as Finisair demonstrated yesterday is only a matter of time) we believe, as the attached chart shows, that the fair value of the stock market is about 120 points lower. Since this is a relative comparison, those who do not wish to trade a single series, can put on a pair trade of short the Gold/Copper ratio (predicting it will decline from the current 3.4 - it is shown inverted on the chart below) and short the S&P in expectation of a compression.

And for those who wish to have nothing to do with the Fed's third mandate in the form of the stock market (which is all), another even more convoluted way to play the current multi-asset mispricing, is to go long the Gold-Copper ratio (expect gold to stay flat while copper declines), while shorting the Gold Miner/Copper Miner ETFs (GDX, COPX).

Lastly, those who just want to play with gold, an interesting observation is that Gold has marginally outperformed Gold Miner stocks. An appropriate and simple compression trade here would be short gold and long gold miners for a few basis points compression.

 

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Wed, 03/09/2011 - 17:09 | 1034080 greg merrill
Wed, 03/09/2011 - 18:54 | 1034431 william the bastard
william the bastard's picture

"To hedge my short base metals position I'm also long precious metals and this combination has worked out well recently."

 

Wow! This ZH srticle sailed right into your broadside.

Thu, 03/10/2011 - 00:40 | 1035546 greg merrill
greg merrill's picture

Well I think it all depends upon your opinion of where the markets go next and how to trade it. As you may imply from my blog post I think the trend in gold/copper ratio is higher whereas what the ZH post is more of a reversion trade on gold , copper, the spx, and gold shares.

Frankly thats a bit too complex for me and I'll keep it simple.  I think we could both be 'right' on this one.

Wed, 03/09/2011 - 20:37 | 1034707 rocker
rocker's picture

@greg merrill   Thanks for the blog site.  Always a welcome to learn another honest view.  Love the Xtra Normal Characters.

Thu, 03/10/2011 - 00:42 | 1035554 greg merrill
greg merrill's picture

Thanks.  Now hopefully I won't look like a fool in 3 months :)

I pretty confident it should work unless QE 3, 4 & 5 are initiated.  Then I'll have to rethink it. Hopefully the long precious metals will help there if The Ben Bernank really goes crazy with the print button.

Wed, 03/09/2011 - 17:10 | 1034088 jus_lite_reading
jus_lite_reading's picture

You mean the 20% unemployment rate is not enough to tell you the economy is weak? Just joking of course but yes I see that as a possible trade in the coming weeks. Also, how much gold is really in the IMF's valuts? That I'd like to know.

Wed, 03/09/2011 - 17:27 | 1034144 Sudden Debt
Sudden Debt's picture

As much 100 mills bars as you can dream of!

 

Wed, 03/09/2011 - 17:16 | 1034104 NOTW777
NOTW777's picture

today was exhibit A for this; metal was green while PM equities were pounded

still think its worth it to buy the dips on select equities in addition to adding physical

Wed, 03/09/2011 - 17:30 | 1034157 gina distrusts gov
gina distrusts gov's picture

Intresting note Apmex has almost NO canadian  mint silver for sale

Wed, 03/09/2011 - 17:40 | 1034181 Pringsh Peensh
Pringsh Peensh's picture

Ummmm, I just checked Apmex too...and there's not much of anything in there. They're looking really low right now. Even the 1oz Buffalos are on back order (like the 1st time ever).

Wed, 03/09/2011 - 17:57 | 1034223 Sudden Debt
Sudden Debt's picture

eagles are selling for 45$ at straightsilver... WOW! They used to be dirt cheap!

I bought most of mine between 22/24$

The once I paid most for where silver panda's 2010 which I bought for 26$

Now I mostly look for good deals on auction sites. And believe me, you can still find enough of them!

 

Wed, 03/09/2011 - 18:07 | 1034257 johnQpublic
johnQpublic's picture

craigslist my friend

excellent deals to be found for the patient man

i just found a guy who wants to trade a double eagle for a new muzzle loader

deal!

we're getting together and going to the gunshop tomorrow

i expect to spend 700-1000 for the guys new gun, in exchange for 1400 in gold coin

Wed, 03/09/2011 - 20:03 | 1034614 agNau
agNau's picture

You can take that muzzle loader and shoot a few Grizzlies when released. One reason above the demand stripping supply on Maples now is the mint requiring more capacity for the Grizzly.(1million only.) Good hunting!

Thu, 03/10/2011 - 08:57 | 1036124 DosZap
DosZap's picture

Go Armed.

Wed, 03/09/2011 - 18:11 | 1034269 I Got Worms
I Got Worms's picture

I just took a roll of 20 American Eagles out of circulation in Austin at my coin store. $41 bucks. 5$ over spot.

Wed, 03/09/2011 - 20:32 | 1034700 DosZap
DosZap's picture

Nope, and will be a short wait for more deliveries, and its tat way most everywhere I checked.Also their head knoocker said thjere wa going to be a price increse to Dealers.

My Dealer told me today,that they are already being hit with ADDITIONAL prems from the US Mint on Eagles.

Wed, 03/09/2011 - 17:23 | 1034124 DoChenRollingBearing
DoChenRollingBearing's picture

Comparing gold price to copper price does not seem to add much value to me, as they are such different metals with so many end uses.

Maybe that more investors want to hold their wealth in gold and a recession in China???

Wed, 03/09/2011 - 19:48 | 1034571 UncleFester
UncleFester's picture

That's the point DCRB, copper is the pure industrial metal whereas gold is the pure savings / lifeboat metal.

Thu, 03/10/2011 - 00:47 | 1035569 greg merrill
greg merrill's picture

Fester is right. To put it another way the gold/silver ratio eliminates what you are comparing just copper to (the dollar) 

 

 

Wed, 03/09/2011 - 17:23 | 1034125 william the bastard
william the bastard's picture

I saw the words "short gold" on zehe! Gasp! The end is nigh. The sardine wipe out at Redondo pier truly is the precursor of end times and now another prophet has spoken.

Wed, 03/09/2011 - 17:30 | 1034155 JonNadler
JonNadler's picture

Jon Nadler go back to Kitco

Wed, 03/09/2011 - 17:34 | 1034169 DoChenRollingBearing
DoChenRollingBearing's picture

Don't try sneaking away from your job, JonNadler!

It's battlestations over there at JP Morgue, and you have been summoned back!  I hope that does not include "weekend work" with Blythe...

Wed, 03/09/2011 - 19:30 | 1034527 JonNadler
JonNadler's picture

who's more lame ? me, or Jon Nadler using the same old tired arguments pretending to be William the Bastard, Methman, BiggerDickus, Appalling Smells, etc, etc, etc

 

after all silver only costs $5 to get out of the ground and if you bought it in 1980 at 50 (during those 5 seconds while it was 50) then you're still down. Silver really sucks doesn't it

Wed, 03/09/2011 - 20:47 | 1034725 william the bastard
william the bastard's picture

"after all silver only costs $5 to get out of the ground"

 

Golden Minerals Co. AUMN. $300MM market cap. Their signature, wholly owned property holds some 60 Million ounces high grade silver. Accessible and powered Argentine Andes. Aye there's the rub!

Wed, 03/09/2011 - 18:04 | 1034243 whoopsing
whoopsing's picture

take a deep breath william,lest you suffer the same fate as those fish-lack of O2

Wed, 03/09/2011 - 18:53 | 1034426 Papasmurf
Papasmurf's picture

Sounds like a strong buy signal to me.

Wed, 03/09/2011 - 18:55 | 1034433 william the bastard
william the bastard's picture

Sounds like a good move.

Wed, 03/09/2011 - 17:22 | 1034127 NOTW777
NOTW777's picture

time for another strong "statement" from the WH

http://www.dailymail.co.uk/news/article-1364469/Gaddafi-blows-Libyas-oil...

Wed, 03/09/2011 - 17:34 | 1034134 Cdad
Cdad's picture

Copper is priced for stupid, and has been that way for months.

As for going long or short the ratio...not sure that is necessary.  Just buy the VIX where near futures have been massively accumulated over the past two weeks, and where the VIX notes [VXX] just broke above the 50 day sma...after months of institutional [naked] shorting.  Ummm...and folk are not even waiting for tomorrow's bell, as VXX is being chased up as I post.

Bad day for the market tomorrow...clearly.  Today's levitation was stupid.  Many underlying stocks were being sold as the ETFs were propped up...and the ETFs are now predictably falling off in the AH.

Zero credibility in this market.  None.  Thanks criminal syndicate known as Wall Street for your many obvious and observable manipulations of markets....WITH MY FUCKING MONEY!

PERP WALKS!  MORE PERP WALKS!  MORE FIRED BANKERS!  MORE J. DIMON WHINING!  MORE SELLING OF INFINITY SHARES!

Wed, 03/09/2011 - 17:44 | 1034193 Sudden Debt
Sudden Debt's picture

chasing the vix is gambling :)

But I think it will first drop to 14/15 and spike again in june to 40.

That will toast the vix speeders.

Wed, 03/09/2011 - 17:46 | 1034203 Cdad
Cdad's picture

There is not a single element left of this stupid market that is not gambling...courtesy of the criminal syndicate known as Wall Street.  Ask a long holder of FNSR [which is to ask Bruce].

As for the VXX call, I am talking right now, for tomorrow/rest of the week.  VIX is not going to 15 tomorrow morning, I assure you.

Wed, 03/09/2011 - 18:06 | 1034254 A Man without Q...
A Man without Qualities's picture

"Copper is priced for stupid"

I agree, and lots of stupid hedge funds are long the trade, assuming either the Fed will achieve their goal of reflating the economy.  I had copper miners as my core position since in March 09, but closed out completely in January for a few reasons:

China was beginning to worry me and their copper markets are very opaque

The price rise had been suspiciously smooth for too long.

Copper mining cos were very quiet both on the demand and the price outlook, all the noises were coming from the banks, but the miners were almost silent.

Copper may be a decent inflation hedge, but it isn't a hedge of the tail risk on collapse.

I'm still long gold, and have been looking at shorting the miners, but nothing done so far.  This market seems broken to me, and I know the big players are fighting for every inch, because they fear even a minor correction could lead to something catastrophic...


Wed, 03/09/2011 - 18:10 | 1034263 Cdad
Cdad's picture

I know the big players are fighting for every inch, because they fear even a minor correction could lead to something catastrophic...

Absolutely a correct assessment.  The whole market is priced for stupid as they are using peak earnings to project forward earnings...and while they talk that game, I don't think any of them actually believe their own calls.

Wed, 03/09/2011 - 18:40 | 1034387 6 String
6 String's picture

The big players aren't fighting: they are throw hail mary desperation passes now. They are doing everything they can to game the market a little higher and PM's lower in shear desperation.

PM's are their number 1 long term enenmy. The too biggies are doing everything they can to muscle this, but gravity is a bitch, as they say.

I think if I had to close my eyes for 5 years i could just go long gold and silver in equivlent amounts to the TBTF fucktards. When i wake up 5 years hence, one or the other would have carried me.

 

 

Wed, 03/09/2011 - 20:42 | 1034716 DosZap
DosZap's picture

The too biggies are doing everything they can to muscle this, but gravity is a bitch, as they say

 

Stats, a commodity against the supreme insurance policy on the planet.......Uh, I will stick to Au, and Copper be damned.

To think strong hands are going to LET go at this point is insanity.I personally see no way the Copper issue,v.s. Au has anything to do with MONEY.

Wed, 03/09/2011 - 19:55 | 1034592 long-shorty
long-shorty's picture

Maybe you'll be right this time, and not saying you fit this description, but people who indiscriminantly buy VXX with an exceptionally backwardated volatility term structure month after month after month DESERVE to lose money. Yes, I said it. Joe Blow investor who buys a stupid product DESERVES to lose money. I'm sorry but if observed vol is at 14 and spot vol is at 22 and three months out is freaking 30 (not necessarily the present situation, but it was like this for months), then who can blame institutions for selling vol.

The tragedy is only that such losses should apply to EVERYONE who allocates capital stupidly, not just individual investors. And, God knows, most "professionals" who allocated capital very stupidly in 1998-2000 and 2005-2008 are still doing just fine, with record bonuses to boot.

We probably shouldn't also have VIX options or futures, b/c all it would take is enough open interest in vix calls in the right market environment, and the CBOE would fail. It's an inherently unsafe product for the exchange. But that doesn't excuse individual investors. Nobody makes anyone buy lottery tickets, and nobody makes anyone carry a position in VXX long-term.

Wed, 03/09/2011 - 17:30 | 1034152 reader2010
reader2010's picture

You mean Dr. Copper knows shit this time?

Wed, 03/09/2011 - 17:38 | 1034172 Cdad
Cdad's picture

Dr. Copper stopped knowing shit when the primary consumers became crazed Chinese people, and JP Morgan shifted its metal manipulation efforts from silver to copper via another stupid and corrupt ETF creation.

Dr. Copper is a retired, drunk doctor, bought out by the criminal syndicate known as Wall Street.

 

Wed, 03/09/2011 - 19:43 | 1034557 UncleFester
UncleFester's picture

Copper...the poor man's silver.

UF

 

Wed, 03/09/2011 - 23:51 | 1035344 DoChenRollingBearing
DoChenRollingBearing's picture

That's good!  LOL...

Wed, 03/09/2011 - 17:30 | 1034153 Sudden Debt
Sudden Debt's picture

Gold has one more little rally in it to 1500 and will most likely retrace back to 1300 after the summer and after that it'll go back up to 1600.

 

I don't see the link to copper... Plenty to go arround and so industrial related. If copper goes down production is going to go down.

 

Silver on the other hand... MAGIC!

Wed, 03/09/2011 - 17:36 | 1034171 hamurobby
hamurobby's picture

I don't see the link to copper... Plenty to go arround and so industrial related. If copper goes down production is going to go down.

 

Silver on the other hand... MAGIC!

 

If copper production gets shut down, what would that do to silver production? Isnt silver a byproduct of copper mining? I guess no one will want silver either...

Wed, 03/09/2011 - 17:50 | 1034209 Sudden Debt
Sudden Debt's picture

silver as byproduct of copper is about 45%

the rest is mined in silver mines.

So if copper drops, mining drops silver goes up because of it. The high copper price made the mining go up bigtime.

So you logic is wrong, copper down = silver up.

And as silver is also a investment product, demand keeps going up.

 

Also just for info:

Silver is mined as a extra in copper mine but is never in the same vains. The often run nearby. Some copper mines forbit it for their miners to mine the silver vains because of the higher mining cost.

Wed, 03/09/2011 - 20:53 | 1034740 rocker
rocker's picture

Excellent come back Sudden Debt. I was thinking the same as I read 'if copper mining drops'.  It WILL make silver go up more. As it will with the Silver Miners such as the ones in Mexico. They are opening old mines every day. It's a Gold mine for Silver mines.   Go Silver.  Just Buy All the Fuckn Dips.  We are very close to a Silver rout.  Good Luck all Silver Traders.

Wed, 03/09/2011 - 21:36 | 1034848 hamurobby
hamurobby's picture

 No one will want silver? <snicker>

Sorry guys, guess I need to write SARCASM when being sarcastic. Damn right silver will skyrocket if they start shutting down copper mine production!

Wed, 03/09/2011 - 20:47 | 1034728 DosZap
DosZap's picture

Thats a hoot,its also a by product of gold mining, and lead, and tin.

If your correct, and I PRAY you are, I see $500oz Silver by yrs end.

Before its over I see it at parity.

Wed, 03/09/2011 - 17:38 | 1034176 Pladizow
Pladizow's picture

Those who predict the future, lie, even when they tell the truth!

Wed, 03/09/2011 - 22:06 | 1034919 Money 4 Nothing
Money 4 Nothing's picture

Pladizow!  you gotta send me that link for your GIF! just amazing pic!

 

The Bad Guy.

 

Wed, 03/09/2011 - 17:57 | 1034221 ZeroPower
ZeroPower's picture

High Indian buying season this year at end of year = id guess around $2000, +/-

Wed, 03/09/2011 - 17:33 | 1034162 metastar
metastar's picture

Wish I had a Bloomberg!

Wed, 03/09/2011 - 18:01 | 1034232 hambone
hambone's picture

Tried but couldn't come up w/ the SOMA schedule and when it is finished?  Anybody have a link or know the answer?

Wed, 03/09/2011 - 18:09 | 1034259 ShankyS
ShankyS's picture

Unless the /NG-Oil correlation is dead there may be some sort of LT compression here, eventually, someday. I still think NG is going to 2.60 or worse (wonderful economic indicator). No telling where oil will go. 200, 300 as long as someone is making money and the masses are gettting screwed it should continue the trend to the max.

http://bit.ly/dZbMMm

Wed, 03/09/2011 - 18:33 | 1034359 Debtless
Debtless's picture

does anyone have any actual evidence of people at the silver COMEX where contracts are coerced in cash settlement with at least 25% bonus?

Wed, 03/09/2011 - 20:47 | 1034733 DosZap
DosZap's picture

WB said so.(;

Wed, 03/09/2011 - 20:45 | 1034724 eddiebe
eddiebe's picture

It could just be a bear raid in copper by JPM. Those fairly big drops in the last couple of days look suspicious to me. At this point the boyz are desperate to keep the bond from dropping off. They may do some sacrificing in the commodities and the dow.

 I doubt that they will let it drop as deep as 2008/09, as that would just totally freak investors that are just starting to recover.

 I think the big story is the bond.

Wed, 03/09/2011 - 20:50 | 1034738 DosZap
DosZap's picture

I think the big STORY is who the Assholes are in control of the Copper Mkts now.

We NEVER saw anything like this UNTIL JP MORGUE got control.

Need I say more?.

Wed, 03/09/2011 - 20:58 | 1034753 rocker
rocker's picture

Enough said.  I would just like to figure out who's the bigger scumbag: JPM or GS.  Alias: The Morque vs. Godman Shafts. 

Wed, 03/09/2011 - 22:40 | 1035023 gordengeko
gordengeko's picture

http://www.telegraph.co.uk/finance/newsbysector/industry/8180304/JP-Morgan-revealed-as-mystery-trader-that-bought-1bn-worth-of-copper-on-LME.html

Could JPM be tanking the copper price to try and preceed a drop in gold/silver?  Copper at an 11 week low???  JPM took control of the copper market when?  about 11-13 weeks ago???  Go ahead take silver back down to 27.50, not only will probably triple the amount of physical come off the shelf again (if it even exists) but also another chance at some easy fiat in AGQ will be appreciated! 

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