The Copper-Gold Ratio

London (July 29)  This week's roll out of an affordable Tesla may have also caused analysts to begin increasing their projections for the global demand of copper. The average American car has approximately 55 pounds of copper wiring, while electric cars require closer to 150 pounds. As a result, the International Copper Association increased copper demand for cars and buses from 185,000 tons in 2017 to 1.74 million tons in 2027. The near ten-fold increase would represent 7% of today's global copper production. Moreover, years of depressed copper prices caused copper miners to defer green field projects. They, instead, increased output via smaller brownfield expansion projects, which have already come on the market. Freeport McMoRan's CEO, Richard Adkerson, highlighted on a recent conference call that the market would require prices to remain north of $3.00 per pound in order to incentivize new mine investment. From there a new mine would take between five and ten years to start producing copper ore. These projected changes in supply and demand fundamentals are beginning to have a material impact on both the absolute price of copper and price of copper relative to that of gold.

The copper-gold ratio is calculated by dividing the market price of copper by the market price of gold. Copper is an industrial metal. It is used in plumbing, electric wiring, and its anti-bacterial properties coupled with its malleability lend the metal to be used in medical equipment. Demand increases during periods when economic output is rising. Gold is a store of value. It is molded into ingots, bullion, or displayed as jewelry. Its actual industrial applications are limited. The differing uses of the metals has allowed the copper-gold ratio to act as an accurate barometer of global growth.

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