Copper(x2)/Gold Spread: Long-Awaited Birth of the Bull?

The Real McCoy?

Just before Memorial Day, the IMC blog bought a December copper(x2)/gold spread.  The position was liquidated with a loss a few weeks later when the spread hit new lows for the move.

Glad we got out.  The spread proceeded to head south.  Just a month after our exit, the nearest-futures copper(x2)/gold spread breached major support at the 2009 all-time low of -$29,380 (premium gold).

However, there was no dramatic waterfall decline triggered by the support break.  The spread bottomed at -$30,085 on July 7th and the reversed higher.  The bottom was established less than $1,000 below the 2009 Financial Crisis low.

However, the July low was finally broken right after Labor Day.  That’s when the copper(x2)/gold spread crashed to…-$30,840.  Huh.  Not very dramatic, was it?  The September low was set in place only $755 below the July low.

copper-x2-gold-spread-daily-nearest-futures-for-10-yrs

Copper (x2) Gold spread daily (nearest-futures for 10 yrs).jpg

The fact that the spread cracked the Financial Crisis low by a slim margin –twice!– and then quickly turned around indicates that this bear market is scraping the bottom of the barrel.  As a matter of fact, it is a major buy signal.  Readers of this blog may be familiar with what we call this pattern: The Wash & Rinse.  It’s a failed breakout signal that often leads to a major move in the opposite of the initial breakout.  Looks to me like that’s what happened.

Bullish Trend Change

Back in June, the blog set trade parameters in place to take another crack at the long side of the December copper(x2)/gold spread.  Our trigger point was to get in if/when the spread could make a two-day close above resistance at the declining 100-day Moving Average.

Prior rallies had ended either side of the 100-day MA, so a sustained close above the 100-day MA would be our indicator that the switch had been flipped.

december-copper-x2-gold-spread-daily-100-day

December Copper (x2) Gold spread daily (100-day MA)

Last week, the trend change finally happened.  The spread made a two-day close above the 100-day MA for the first time in over fifteen months.  The fact that it occurred after a Wash & Rinse off of historic lows endorses the idea that a major bottom is in place.

Therefore, the IMC blog entered a long position in the December copper(x2)/gold spread at -$23,100 on September 29th.

Like we said a few months before, we believe that a bullish trend change signal could position us in the buying opportunity of a lifetime before it makes any fundamental sense.  Last week’s action may have just done that.

More Confirmation

Commodity markets are mean-reverting, so trends that reach historic extremes are often followed by sizable trends in the opposite direction.

Not only did the copper(x2)/gold spread reach an all-time low last month, but the ratio between the value of one 25,000 lb. copper contract and one 100 oz. gold contract also bottomed at a multi-year low of 0.386:1.  This was just a stone’s throw from the Financial Crisis low of 0.35:1.

Keep in mind that the copper/gold ratio has only been at 0.35:1 or lower on three occasions in the last four decades.  So this was a rare event to get in the same vicinity.  The fact that the copper/gold ratio also surpassed the 100-day MA for the first time in over fifteen months was more confirmation of a trend change off of historic lows.

copper-x2-gold-spread-weekly-underwater-line

Copper (x2) Gold spread weekly (underwater line)

In addition, the copper(x2)/gold spread is still inverted!  It has been underwater for over nine consecutive months now.  This is the longest inversion since the mid-1980s.

So despite the recent trend change and the run to a three-month high, the copper(x2)/gold spread is still historically underwater.  This leaves a lot of profit potential ahead of us.  You can bet that we will be watching vigilantly for opportunities to add to our long position as the trend unfolds.

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