Gold and other precious metals can help gauge inflationary pressures
Copper and other industrial metals can be a proxy for consumer and business sentiment
With both monetary and industrial uses, silver can offer a little of both
The link between precious metals, precious metal prices, and the economy can be traced back more than 2,000 years. Metals have been (and still are) used as money, i.e., 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 largest 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 keep an eye on the metals market.
Case in point: The stock market’s rebound from the March 2020 low has been nothing short of impressive. But if the stock market’s performance was impressive, then the metal industry’s advance may be considered equally, if not even more, spectacular. Over the same time frame, metals have advanced double and even triple digits in percentage terms (see figure 1).
FIGURE 1: DEMANDING. Futures prices on gold (/GC—candlestick), copper (/HG—purple line), and silver (/SI—blue line) surged after the 2020 pandemic lockdown as demand began to outstrip available supply and inflationary concerns heated up. Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
So, what might industrial metal and precious metal prices be possibly signaling with regard to investor sentiment, the general state of supply and demand, and the broader stock market in general? Let’s take a look.
Gold: The Traditional Monetary Safe Haven
The yellow metal is traditionally thought of as a hedge against inflation and, for some, a declining stock market. Like a canary in a coal mine, gold can be useful for sniffing out investors’ inflationary fears. How so? Gold is seen as a leading indicator of inflation risk, according to JJ Kinahan, chief market strategist at TD Ameritrade. “We’ve had cheap money for so long, many believe that if the economy picks up, inflation is a real risk,” he said.
And in mid-2021, with the Fed holding the federal funds rate near zero to help boost a post-pandemic economic recovery—following a decade of sustained low rates—some investors have flocked to gold as a potential hedge. That’s in case the anticipated “transitory” inflation wave (in the words of Fed Chair Jay Powell) turns out to be a much higher and longer-term tide.
Silver: The Monetary-Industrial Hybrid
Silver is in a unique spot. On one hand, it’s a precious metal. Like gold, it too once backed the U.S. dollar when the greenback was pegged to a gold standard. So, silver is still viewed as a safe haven—a monetary metal.
On the other hand, silver has plenty of industrial uses, including solar energy, lithium batteries powering laptops, and a wide assortment of printed and flexible electronics. According to the Silver Institute, electronic silver demand has surged from under 10 million ounces (Moz) in 2010 to a whopping 48 Moz in 2020, an indication the industrial appetite for silver has been growing at a robust clip because the future’s renewable energy build-out requires more of it.
So, when you think of silver’s price having more than doubled in 2020, it might be worth your attention as an investor as well as a consumer. Is this uptrend an indication of monetary fears—namely, the need for a potential safe haven against inflation—or a reflection of industrial optimism, particularly the global movement toward renewable energy? Or maybe a hybrid of both? After all, silver may shine in both worlds, night and day.
Copper: The Electric Clang of Industrial Expansion
Copper. It’s a lot more than those pennies that used to buy a gumball at the neighborhood shop—especially because those pennies have been mostly made of zinc since 1982.
Copper is a widely used industrial metal. Its applications span a wide range of multi-sector construction and manufacturing, from mega municipal and commercial sites to mass-manufactured products like automobiles, all the way down to the plumbing, electrical, heating, and cooling systems in your home. So, when copper prices rise, investors traditionally view it as a sign the engines of global industry are revving up.
Like most industries across the globe, copper’s mining and supply chain operations took a hard beating during the COVID-19 lockdown. Arguably, shortage of supply may be one of the tailwinds driving its staggering 107% price rise from the pandemic low through May 2021.
Copper prices also suggest that demand, particularly as economies attempt to open up and recover, has only grown red hot for the red metal.
In addition to “legacy” demand, however, copper is also critical to electric vehicle (EV) production. If the current trajectory holds, the world looks to be headed toward an EV future. Add to this the Biden administration’s proposed infrastructure plan, continued growth across the Pacific Rim, and a general reflation after the pandemic, and it’s easy to see how copper demand could continue to outstrip supply.
Ready to take the plunge into futures trading?
TD Ameritrade offers access to a broad array of futures trading tools and resources. Access more than 70 futures products nearly 24 hours a day, six days a week.
Metals and Markets Intertwined, Sometimes Like a Tight Coil
Intermarket relationships can sometimes be likened to a mechanical balance scale with two pans 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 to interest rates, according to Sam Stovall, chief investment strategist at CFRA. That simply means a rise in interest rates tends to have a negative influence on precious metal prices.
And take “Dr. Copper,” a market moniker that endows the red metal with an honorary Ph.D. in economics because it’s popularly believed to forecast global economic turning points. A rise in demand is taken as a leading indicator of economic optimism or health, given its widespread use in just about every sector of the global economy.
But heed the caveat: Don’t expect these relationships to move in lockstep with one another. The economy isn’t a machine. There’s no exact synchronicity. Like people, market relationships are organic, driven by human action, not by mechanistic models of production and consumption, and rarely in a straight line.
Can the Sound of Metal Ring an Early Warning System?
Precious metals investing isn’t for everyone. The metal trade, in general, may not be something most investors are familiar with. Yet, even for those who aren’t interested in trading precious or industrial metals, metal price trends can offer potential clues to equity investors. They may add another layer of confirmation when you’re trying to forecast the overall market environment.
Take gold, for instance. “I like to look at gold in sync with the Cboe Volatility Index (VIX) and government bonds,” Kinahan noted. “When I see the three of them headed higher together, I generally use that as a warning system that there could be trouble ahead for stocks, as those are areas investors turn to when they’re nervous.”
This is just one example of so-called “intermarket analysis”—using data from across various market segments and asset classes to develop a complete picture. But intermarket analysis can sometimes be akin to drinking from a firehose. There are so many places to look and so many data points—all at your fingertips with today’s brokerage platforms. Still, using the industrial and precious metals market as one component of a full fundamental analysis can help you see the big picture.
Consider keeping an eye on the futures market. The thinkorswim platform lists several of CME Group’s (CME) metal futures contracts. Even if you’re not a futures trader—and futures trading isn’t for everybody—futures price trends can be a valuable information source.
Just remember that correlation isn’t necessarily causation, and preparation for potential market turning points isn’t the same as prediction. The precious and industrial metals market might help you forecast or confirm the trends driving the broader market. But as with all forms of analysis, it takes time, dedication, and skill to make this approach usable.
Karl Montevirgen is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.