The connection between precious metals, precious metal prices and the economy dates back over 2,000 years. Metals were (and still are) used as money, that is, as a means of payment in exchange for goods and services as well as a store of value. Metals also have countless industrial uses, from everyday household items to the tallest skyscrapers and the machines used to build them.
Put it all together and it’s easy to see why investors, bankers, captains of industry and policy makers are keeping tabs on the metals market.
The stock market’s rebound from the March 2020 low to the January 2022 highs was nothing short of impressive. But if the performance of the stock market has been impressive, the progress of the metal industry can be considered equally, if not more, spectacular. Over the same period, metals have grown by double and even triple digits in percentage terms (see figure 1).
Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Futures prices on (GC – candlestick), (HG – purple line) and (SI – blue line) surged following the 2020 pandemic lockdown as demand began to outstrip available supply and inflation concerns were intensifying.
So what could industrial and precious metals prices signal with respect to investor sentiment, the general state of supply and demand, and the stock market in general? We’ll take a look.
Gold: the traditional monetary “safe haven”
The yellow metal has traditionally been seen as a hedge against inflation and, for some, against a falling stock market. With inflation hitting 40+ year highs and stock markets entering a bear market, it’s no surprise that investors are looking for an investment that can offer some protection against these downturns. market. While gold has historically offered a measure of protection in longer-term periods of rising inflation, the short-term benefits are less certain.
In mid-2022, as the Federal Reserve raised interest rates to help stem rising inflationary pressures, the risk of slowing global growth or even a recession clouded some of the shine of gold in the short term. However, if inflation spikes and the US dollar begins to weaken, gold could once again fulfill its traditional role of inflation protection. According to the Silver Institute, global industrial demand for silver has increased from 445.2 million ounces in 2012 to approximately 539.6 million ounces in 2022.
Money: the monetary-industrial hybrid
The money is in one place. For one thing, it’s a precious metal. Like gold, it also supported the US dollar when the greenback was pegged to a gold standard. Thus, silver is still generally considered a “safe haven”, a monetary metal.
On the other hand, silver has many industrial uses, including solar power, lithium batteries powering laptop computers, and a wide assortment of printed and flexible electronics. According to the Silver Institute, demand for electronic money has grown from less than 10 million ounces (Moz) in 2010 to a whopping 48 Moz in 2020, indicating that the industrial appetite for silver has increased to a sustained pace because the future development of renewable energies requires more of that.
So, when you think the price of silver has more than doubled in 2020, it may be worth your attention as an investor as well as a consumer. Is this bullish trend an indication of monetary fears, namely the need for a potential haven against inflation, or a reflection of industrial optimism, in particular the global movement towards renewable energy? Or maybe a hybrid of the two? After all, silver can shine in both worlds, day or night.
Copper: the electrical noise of industrial expansion
Copper – it’s a lot more than those pennies you used to buy chewing gum at the neighborhood store – especially because those pennies have been mostly zinc since 1982.
Copper is a widely used industrial metal. Its applications span a wide range of multi-industry construction and manufacturing, from municipal and commercial mega sites, to mass-produced products like automobiles, to your home’s plumbing, electrical, heating and cooling systems. So when copper prices rise, investors traditionally see it as a sign that the engines of the global industry are revving up.
Like most industries around the world, copper mining and supply chain operations have been hit hard during the COVID-19 lockdown. Arguably, the supply shortage may be one of the tailwinds driving its historic 107% price rise from the pandemic low to July 2022.
Apart from the “traditional” demand for the red metal, copper is also essential for the production of electric vehicles (EVs). If the current trajectory continues, the world could be heading towards an electric vehicle future in which demand for copper could continue to outstrip supply.
Metals and markets intertwined, sometimes like a tight coil
Intermarket relations can sometimes be likened to a mechanical balance with two platforms suspended on either side of a fulcrum. When one side goes up, the other side goes down.
For example, the gold and silver markets generally have a negative correlation with interest rates. It simply means that a rise in interest rates tends to have a negative influence on precious metal prices.
And take “Dr. Copper,” a market moniker that gives the red metal an honorary doctorate in economics because it’s commonly believed to predict global economic turning points. An increase in demand is seen as a leading indicator. economic or health optimism given its widespread use in almost every sector of the global economy.
But heed the caveat: don’t expect these relationships to evolve in parallel with each other. The economy is not a machine. There is no exact synchronicity. Like people, market relations are organic and driven by human action, not mechanistic patterns of production and consumption, and rarely in a straight line.
Can the sound of metal constitute an early warning system?
Investing in precious metals is not for everyone. Metals trading, in general, may not be something that most investors are familiar with. Yet, even for those unwilling to invest in precious metals or industrial metals, metal price trends can offer potential clues to equity investors. They can add another layer of confirmation when trying to forecast the overall market environment.
Some like to watch gold in sync with the Cboe Volatility Index () and government bonds. When the three move together in the same direction, it could be a sign of trouble for stocks as investors head into less risky territory.
This is just one example of what is known as “intermarket analysis” – using data from various market segments and asset classes to develop the complete picture. But intermarket analysis can sometimes be like drinking from a fire hose. There are so many places to look and so many data points, all at your fingertips with today’s brokerage platforms. Nevertheless, the use of the industrial and precious metals market as one of the components of a fundamental analysis can help you see the big picture.
Remember to keep an eye on the futures market. The thinkorswim platform lists several CME Group metal futures contracts. Even if you’re not a futures trader – and futures trading isn’t for everyone – futures price trends can be a valuable source of information.
Remember that correlation is not necessarily causation, and preparing for potential market turning points is not the same as predicting. The precious and industrial metals market could help you predict or confirm trends driving the broader market. But as with all forms of analysis, it takes time, dedication and skill to make this approach usable.
Disclosure: TD Ameritrade® Commentary for educational purposes only. SIPC member. Options involve risk and are not suitable for all investors. Please read Features and Risks of Standardized Options.