While HG copper has reached the highest level in seven years, gold has now declined by 14% since the August peak from $2063/oz. On Friday, during a 60 minute window in a relative thin Thanksgiving holiday market, the price slumped below $1800/oz with close to 60,000 lots (6 million ounces) swapping hands in the COMEX gold futures contract.
Gold’s spectacular rally to a record high this year helped drive a large amount of investment demand from investors seeking diversification amid a surge in fiscal and monetary spending driving reflationary concerns. Despite peaking in August, demand for exchange-traded funds backed by bullion continued to climb until mid-October when total holdings peaked at 3450 tons. Since then and especially since November 9 total holdings have declined by nearly 100 tons to a four-month low.
Back in January and before other markets realized what the world was about to face, Dr. Copper was the first market to send out a signal of distress as the Covid-19 emerged in China. However with China being the first major economy to recover from the impact, copper, given its near 50% dependency of Chinese demand has witnessed a very impressive 65% bounce back from the March low.
Apart from the current strong momentum driving increased speculative investment demand both in and outside China, the fundamental reasons behind the rally to a seven-year high has been explained by strong Chinese physical demand, supply disruptions from virus hit mining operations in South America. Most recently, however it has been the prospects for a vaccine increasing demand outside of China through increased fiscal spending and investments in the green transformation, especially electrification driving strong demand for the red metal.
Just how much the sentiment has changed within the past six months can be seen in the gold / HG copper ratio. After hitting a record high back in April when market conditions were the worst, copper’s relative outperformance since then has been equally impressive with the ratio slumping to a 16-month low.