The Copper-to-gold ratio has tanked to lowest since November 2020, offering bearish cues to risk assets, including cryptocurrencies.
The sliding ratio also means lower interest rates ahead.
Suppose you have been following the crypto market for some time. In that case, you might have heard market participants say that the debut of bitcoin {{BTC}} spot ETFs in the U.S. has unlocked mainstream demand worth billions of dollars, setting the cryptocurrency on a long-term bullish trajectory.
However, traders should recognize that the expected billions are still dependent on economic developments. Hence, traders need to pay close attention to critical macro indicators like the copper-to-gold ratio. The ratio is falling fast, a negative sign for risk assets, including cryptocurrencies.
The ratio, representing the division of the market price per pound of copper by the per ounce price of gold, has dropped over 8% this month, reaching the lowest since November 2020, according to data tracked by TradingView and MacroMicro.
Demand for copper, a metal deeply embedded in the manufacturing sector, is closely tied to industrial activity. Hence, the metal is widely called “Doctor Copper,” a proxy for economic health and investor risk appetite. Meanwhile, gold is considered a haven.
As such, their relative valuation reflects investors’ appetite for risk and growth-sensitive assets like technology stocks and bitcoin relative to havens like gold and Treasury notes. Traditional market giants like DoubleLine Funds are known to track the ratio for cues about demand for risk assets.
“The ratio of copper to gold rises as the global economy expands, and the stocks rise, too. When economic uncertainties increase, demand for gold for hedging rises, and copper-to-gold declines,” the data tracking website MacroMicro said in the chart explainer.
In a nutshell, bitcoin could see downside volatility if the falling copper-to-gold ratio is a guide.
Lower interest rates ahead
Historically, the sliding copper-to-gold ratio has portended a renewed downward trajectory in interest rates, more specifically, the 10-year Treasury yield, or the so-called risk-free rate, according to Double Line Capital.
According to Morningstar, the U.S. Federal Reserve’s benchmark interest is expected to fall from the present 5.35% to 5.5% range to 4.75%- 5.00% at the end of 2024, 3.00%- 3.25% at the end of 2025, and 1.75%- 2.00% by the end of 2026.
So, bitcoin and risk assets could find their footing once the initial shock from potential economic weakness signaled by the copper-told-ratio is priced in. Low interest rates eventually trigger search for yields and renewed inflow of money into risk assets, as observed following the coronavirus-induced crash of March 2020.
