One of the by products of the surging crude oil price has been to create a bid underneath the precious metals markets of gold and silver and to put a damper on expectations of future growth in the overall global economy.
Copper, a base metal, and one which thrives when the economy is improving or growing, has been the beneficiary of the improving economy theme since late last year and had been outperforming gold as the market was becoming more convinced that the worst of the economic problems were behind us and that the entire global economy was on the mend.
The surge in crude oil prices associated with the outbreak of unrest and social instability across the Middle East has caused a dramatic reversal of that recent sentiment. The concern is now focused on how long crude oil prices will stay near current levels and whether or not there is additional upside should events there further deteriorate.
As such, players are dialing back their expectations on global growth a bit and this is leading to some reassessment in regards to copper exposure. Investors and traders are basically saying, "Why own copper which could be hit if things do indeed slow down and why not increase my exposure to gold and silver".
This shift is reflected in the charts presented below. The line indicates the spread between gold and copper. As such, it tends to give us a peek into what the hedge funds are doing with their funds. Since the beginning of February, money has been coming out of copper and into gold. The same holds true for silver which has exploded against copper although it was outperforming the red metal for the last few months of 2010.
As long as crude oil continues strong or works higher, this trade should work and will help to shore up any downside in both gold and silver. It could be a very volatile trade however should crude oil prices reverse sharply for any reason. If that were to occur, the "improving economy" sentiment would see money flow back into copper and perhaps out of gold and silver. That is not to suggest that gold or silver will top; it is merely to say that there might be some reallocation of hedge fund money back into copper and out of gold and silver.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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