Bitcoin Has a Lot Going for It, Except the Persistent Slide in Copper-Gold Ratio

As a seasoned analyst with over two decades of experience in global financial markets, I’ve seen my fair share of economic cycles and market fluctuations. The recent slide in the copper-to-gold ratio is a red flag that I can’t ignore. This ratio, often considered a barometer of global economic health, has dropped significantly this year, particularly since China’s stimulus announcements.

As the likelihood of pro-cryptocurrency candidate Donald Trump potentially winning the upcoming U.S. presidency rises and the anticipation for Federal Reserve interest rate reductions persists, Bitcoin (BTC) enthusiasts have plenty to be optimistic about. Nevertheless, the copper-to-gold ratio, a commonly monitored indicator, is falling, which may warn of potential risks to assets such as cryptocurrencies.

The price of copper relative to gold (the comparison made by dividing the cost per pound of copper by the cost per ounce of gold) has recently dropped to its lowest point this year so far, mirroring values last seen towards the end of 2020, as indicated by data from TradingView.

This year, the indicator, often seen as a stand-in for worldwide economic wellbeing and investment sentiment, has experienced a significant decrease of more than 15%. This is its most substantial decline since 2018.

Telltale sign of economic malaise?

It’s potentially troubling that the ratio has dropped by 10% since China, often referred to as the world’s manufacturing hub and the biggest buyer of commodities, announced a series of economic support measures in late September.

In simple terms, the U.S. Federal Reserve lowered its interest rates by 0.5 percentage points in September, a move meant to stimulate the economy by increasing liquidity, often referred to as “easing.” Yet, this action did not manage to halt the continued fall of the economic ratio.

A consistent downturn might serve as a warning for a more challenging economic landscape that may be going unnoticed by risky investments. Interestingly, copper, an industrial metal, often thrives when the global economy expands and has typically responded favorably to China’s stimulus announcements. On the other hand, gold is generally viewed as a secure investment. Therefore, when the ratio of copper to gold decreases significantly, it is often interpreted as a signal for increased risk.

BTC vs copper-to-gold ratio

As of writing, BTC was up 60% for the year, trading near $67,800, according to CoinDesk data.

Nonetheless, the majority of growth took place during the initial quarter, and since then, the bulls have struggled to establish a new position above $70,000. This bullish struggle has been linked to various factors, one of which is apprehension about supply surpluses due to credit refunds from defunct exchange Mt. Gox.

Interestingly, the decline in the copper-to-gold ratio started in May, signaling potential market caution. This trend intensified in July, hinting at the temporary market uneasiness in early August, during which Bitcoin dropped from $65,000 to $50,000.

Additionally, data from TradingView indicates that the periods of significant growth for Bitcoin, specifically 2013, 2016-2017, and 2020-2021, have been associated with an upward trend in the ratio of copper to gold.

Based on historical trends, the falling copper-to-gold ratio seems to challenge optimistic Bitcoin predictions, suggesting that a rally towards $100,000 by the end of the year might not be likely.