Copper/Gold Spread: A New Four-Year Low Was Hit.

The Metal Meltdown

On September 9th the blog entered a long position in the December copper(x2)/gold spread at +$11,625 (premium copper). The position was liquidated on November 20th at -$4,880 (premium gold), resulting in a loss of approximately -$16,505 per spread.

Copper (x2) Gold spread (nearest-futures) daily

copper (x2) gold spread (nearest-futures) daily

The two-day break below the August low was a bearish event. The spread then clipped support at the January low and finished the week at a new four-year low.

Basis the nearest-futures, support is located at the 2011 low of -$8,730 (premium gold). If the bear market does not end either side of this area, the copper(x2)/gold spread could be on a collision course with the all-time low that was posted in February of 2009 at -$29,380 (premium gold).

Potential for a Snapback

As a reminder, the copper(x2)/gold spread doesn’t usually stay inverted for very long. Even at the depths of the financial crisis, the inversion only lasted a few months. Once the bottom was established, the spread launched a two-year bull market that resulted in a rally of +$124k on a single spread. Therefore, a smart trader will step right back up to the plate and be ready to swing at the next pitch.

Copper (x2) Gold spread (nearest-futures) weekly

copper (x2) gold spread (nearest-futures) weekly

Since the March-February copper(x2)/gold spread has been inverted for a week straight, a close back above’ even money’ might be a good reentry signal. When the spread inverted in January and again in August, the recoveries back above the ‘even money’ mark sent the spread several thousands of dollars higher. Perhaps the same occurrence for the third time this year will be the charm that marks the end of the bear market.

March-Feb Copper (x2) Gold spread daily

March-Feb copper (x2) gold spread daily

A two-day close above the declining 100-day Moving Average (currently around +$5,150) should add confirmation of the trend change. The bounces into the September and November highs both petered out just before the spread tagged the 100-day MA, so a two-day close above the 100-day MA for the first time since the first half of June would trigger a bullish trend change signal in the March-February copper(x2)/gold spread.

Broader Implications

Incidentally, the fate of the copper(x2)/gold spread may be an indication of where the global economy is heading. Even non-spread traders should keep an eye on this one as it could act as a barometer for other investments. I will be expanding on this subject a bit more in a further post.

Reentry Trade Strategy:

The blog will make a hypothetical trade to buy two March copper contracts and simultaneously sell one February gold contract if the spread between the value of the sum of two 25,000 lb. copper contracts and the value of one 100 oz. gold contract closes above ‘even money’. Initially, the spread should be liquidated on a two-consecutive day close $500 below the contract low that precedes the entry.

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