Can the Price of Copper Predict a Recession?

This is interesting. Recently I read about this idea that the price of copper can be a decent indicator of the health of the economy. It's not that obvious unless you take a close look, but copper is used really widely in all sorts of applications.

Some examples are the copper electrical wire in your house and in power stations, it's used in cars and in electronics, medical devices, heating and cooling elements and heaps of industrial machinery. It has a shitload of uses across all different sectors of the economy.

So with that in mind, it kind of makes sense. If economic activity is on the up, if more stuff is getting made, then more copper will be needed which will bid up the price.

Big Dutch bank ABN AMRO did a study on this in 2014, and they found that there is actually a strong correlation between the price of copper and GDP growth in Europe, the US and China. 

Interesting stuff.

So what are the copper tea leaves telling us now?

Not looking great according that recent price chart. BUT, it's not perfect. There are all sorts of issues that can mess with the price of a commodity like copper.

Right now, I think it may be a case of the tail wagging the dog. There are a lot of concerns about a potential recession, which could mean that investors are selling copper in anticipation of a recession.

Commodites in general have also been under pressure lately, with the oil price in particular coming off it’s recent highs. Copper could simply be following along with this trend as traders and investors look to reduce their overall exposure to commodities.

It's not the whole picture by any means, but it's an interesting data point to consider.

Doctor Copper the Leading Indicator

Because of this correlation to the overall economy, copper has been given the nickanem Doctor Copper in commodity trading circles. This isn’t in relation to diagnosing a cough, but rather because copper has a “Ph.D in Economics” due to it’s supposed ability to predict the direction of the economy.

These types of data points are what are referred to leading indicators. These are statistics that can point towards the future direction of the economy or stock market. The data is ‘leading’ the market.

It’s always a bad idea to draw conclusions from a single data point. The price of copper by itself isn’t going to reliably tell you what the future might hold. Would be nice if it did though.

If you’re doing analysis of your own, you need to take into account loads of different peices of information to find a common thread or theme. If a number of leading indicators are all telling you the same story, it might mean you’re on to something.