Precious metals have certainly been leaders, we review the long-term strength established of Gold vs. Copper over the last few years
The commodities space continues to provide several interesting points to watch from a technical perspective as we wrap up the first month of the new year. From energy focused areas rebounding (natural gas continues to surge as the recent winter blast gripped most of the US) to precious metals grinding higher, the space is prime for FOMO and client interest as they see headlines on the nightly news each day. We most recently talked about the overbought nature of the precious metals space in last Friday’s pulse (click here to view to article), where we detailed the contraction of the mint ratio (number of ounces of silver required to buy one ounce of gold). Since that piece, both silver and gold marched forward over the weekend as gold hit 5,000 per oz. and silver putting in highs above $100 an oz. for the first time in history. The >210% OBOS reading for representative SLV would be undoubtedly one of the highest values in recorded history… and begs the question as to when a pullback is in store. Remember, “irrational” price can often times stay that way than longer than you would expect… an important note for those looking to try and time pullbacks for the precious metals place. Put simply, these “tail events” can quickly get out of hand… for better or for worse.
Adding some more color to the overall precious metals conversation, we can journey back to a common Relative Strength (RS) relationship the NDW analyst team will look towards within the commodity space. The chart below details a 3.25% RS chart between copper representative (CPER) and gold fund (GLD). Action last week saw the RS relationship fall back down into O’s, signaling further near-term strength for GLD over CPER. The chart sits on a string of three consecutive sell signal since mid-2024, meaning GLD maintains its long-term strength. An RS switching strategy (owning whichever asset is on a buy signal on this chart) has been historically quite consistent, leading to a profitable outcome over a buy-and-hold strategy of either asset on its own.
It’s also worth nothing that the relationship has been historically helpful in identifying risk-on vs. risk-off environments. Looking back at the chart itself helps us isolate a handful of different instances during which a more “defensive” metal like gold has provided a safe have from a more economically sensitive metal like copper. Gold took control during the dotcom bubble and the GFC, while copper established RS dominance during times of market expansion… most recently coming off the Covid-19 bottom. Continuing this “risk-on/risk-off conversation, it is quite interesting to observe precious metals strength during the last few years worth of the recent bull market… but this can partially be explained away by the increased need for the likes of silver for further AI enhancements and components like GPU’s. Regardless, we will continue to watch this RS chart closely as a historically predictive offense/defense indicator, even if it doesn’t “fit” with the traditional signals right now.
Remember, the overall commodities space is moving quickly right now. It is our job to help contextualize the moves and keep our clients from chasing returns (or shiny objects like silver, pun intended) when we can. While it is undoubtedly true that precious metals like gold and silver are RS winners, it is also key to remember to allocate appropriately, including the use of dollar cost averaging and proper position sizing tools to prevent overall risk appetite disruptions. Remember, keep an eye on the charts to help identify proper entry points when needed.
