Copper/Gold Spread: Stay Long For More Upside

Keep ‘Em Rollin’

Currently, the blog is holding a long position in the March-February copper(x2)/gold spread from the equivalent of -$22,700 (premium gold).  It was entered on September 29th.

We’re still happy with the position.  But with the February gold contract expiring on Friday and the First Notice Day for the March copper contract hitting next Tuesday, it’s time to roll out into the later contracts.  Since the summer spread (July-June) is only about $300 more than the spring spread (May-April), we’re going to opt for more time and hop into the summer spread.

Since peaking out just above +$17k (premium copper) on December 5th, the July-June copper(x2)/gold spread has been stuck in a trading range.  The spread clipped the December 5th high last week, but has retreated once again.  What we need to see is a sustained close above the early December/mid-February high to get the momentum going again.  If that happens, the spread will stay on track for a run to the resistance zone between the 2015 high of +$28,190 (premium copper) and the November 2014 high of +$34,380 (premium copper).

july-june-copper-gold-spread-daily

July June Copper Gold spread daily

But remember that we mentioned before that the ratio between copper and gold (currently around 0.56:1) indicates that the spread could go substantially higher than the 2014/2015 price peaks!  Historically, prior occurrences where two copper contracts traded equal to or at a discount to the value of one gold contract were followed by major bull markets.  Each one lasted until two copper contracts were valued at a minimum premium of 66% over the value of one gold contract.  That puts the ratio at 1.66:1.

To hit this minimum ratio target of 1.66:1, the copper(x2)/gold spread would have to soar to somewhere between roughly +$53k (if the current copper price remained the same) and roughly +$78k (if the current gold price remained the same).

Based on this history, we are watching the spread carefully to see if a setup materializes to add to the long position after a breakout above the current trading range.  We’ll keep you posted if that happens.  For now, though, let’s roll out to the summer contracts.

Trade Strategy:

Sell the two March copper contracts and simultaneously buy two July copper contracts at the market-on-close on Wednesday, February 22nd.  Also, buy back the one short February gold contract and simultaneously sell one June gold contract at the market-on-close on Wednesday, February 22nd.

 

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