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The Changing Relationship Between Copper and the Stock Market

Chart In Focus
January 07, 2011

One of the more interesting relationships lately has been the strong correlation between copper prices and the SP500.  From January 2009 to date, cash copper prices and the SP500 have a +0.955 correlation coefficient.  Part of that can be explained by the fact that both of them have been in an uptrend, and so the phenomenon known as "autocorrelation" helps to boost the score. 

But even if we account for the autocorrelation effect, there is still a strong relationship between the two over the past 2 years.  Before 2008, however, it was not such a strong relationship. 

It used to be that copper prices were closely correlated with T-Bond yields.  Copper was even said by many people to be "the metal with a PhD in economics".  Copper prices would rise during stronger economic times, when demand was up for using copper to build things.  That same rising economic activity also meant more demand for capital, so interest rates would rise.  Copper's relationship to the stock market was much looser; sometimes they would move together, sometimes inversely. 

The 2008 financial collapse seems to have been the agent that has married these two together.  It may be that copper is coming to be seen more as a financial asset as opposed to just another commodity, and the applications by Blackrock and JP Morgan Chase to run copper ETFs is an indication of that change in how copper is viewed. 

During 2009 and early 2010, the relationship between copper and the SP500 became even more interesting.  Even as they moved generally together, there were still slight disagreements and divergences between them.  And when they disagreed, it was nearly always copper that was telling us the truer story about where both were headed.  That was a really nice leading indication to get to have working for us.  

Copper and SP500 2009-2011

Now that relationship appears to be changing.  Since August 2010, we have not seen the same types of divergences that used to be a reliable sign of a trend change.  Now, the SP500's movements seem to be leading similar moves in copper prices. 

In our latest issue of The McClellan Market Report, we did a lengthy exploration of what a copper ETF might mean for the future of copper prices.  One key point is that the storage costs of copper are a lot more than for other metals like gold and silver that already have bullion-back ETFs.  At current prices, it costs about 100 times as much to store a dollar's worth of copper versus a dollar's worth of silver.  So any copper ETF will have to grapple with those higher storage costs. 

The key point for investors to understand going forward from here is that we should not expect the relationship between copper prices and the stock market to stay constant.  It has always been a variable relationship, and any perception of stability in that relationship over the past couple of years may just be temporary, and ending already. 

Tom McClellan
Editor, The McClellan Market Report

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