Commodity ratios and yields

I’m going to try to recap yet again where speculation has brought us before engaging in yet another round. We have suggested that the oil/copper ratio has a close or perhaps leading relationship with the dollar/yield ratio and the yield curve. Finding historical charts of copper/oil and copper/silver is pretty difficult, so I’ve had to make do.

And so will you! I have found a chart of gold/oil and gold/copper ratios. By flipping it this way and that, I have made it show oil/gold and copper/gold. By using your imagination, you can picture the oil/copper ratio. This is still not a good way to check our argument, but until something prettier comes along, this will have to be our companion.

copper/gold (red) & oil/gold (blue)

Blue/red is the oil/copper ratio. Where the lines meet, this appears to be close to the 5:1 ratio (copper/oil) identified by Klombies, but that is another topic we can revisit later. At the moment, let’s try to see if we can maintain any kind of general relationship between oil/copper and the curve spread. One can see that oil is way over copper during the early 1980s, until the collapse of oil price in 1985-1986 that ironically paved the way for the 1987 oil shock. Copper then skyrockets against oil shortly thereafter. It seems to me that these moves so far are reflected in the yield curve.

(I didn't add that conundrum bit)

Then through the 1990s, copper remains at a relatively high level against oil, which slides slowly downwards until oil’s strong move downwards before the end of the decade. Now, if there is a relationship here, then that spike down in the oil/copper ratio seemed to lead the curve spread by a couple years. The spike up in oil/copper soon after would also seem to presage the jump in the spread. We looked at the 2000s on a previous occasion.

oil/copper ratio

I am inclined to say that there is a correlation here, although it would require better data to make more sense of what is going on. There seems to be a lag of less than a year during the 2000s, but from the appearance of our inverted chart above, the lag seemed to be a couple of years at least.

Even supposing there is a correlation and a relationship, what does this really tell us? I’m not altogether sure quite yet. That the oil/copper ratio seems to have a very similar relationship with the dollar/10-year yield ratio would seem to mean that the dollar equals short-end bonds. That seems counter-intuitive, to say the least. And, for the moment, I am going to set that aside and merely note that this is not promising for the pile of conjecture I am accumulating.

In such dire circumstances, the best option seems to be to go boldly forward, ignore this problem, and add new conjecture atop the pyre–I mean pile. I was staring at the oil/silver ratio so long yesterday that I finally realized that it appeared to bear some similarities with treasury yields. The trick is that you have to look at it as the silver/oil ratio. The only way I can do that is to do more magic with the charts I have stolen off the web. Thus I present silver/oil.

silver oil ratio

I confess that it is not a perfect resemblance. And, if I did not believe so strongly in the significance of the oil/gold ratio I’d have given up a long time ago, but here again, I see a resemblance between silver/oil and the fed funds rate.

treasury yields historical

That is strange, because if the oil/copper ratio resembles the yield curve spread (i.e., long/short), then oil ought to most resemble the 10 year yield. But when one considers that it is the silver/oil ratio we are considering, which is the oil price inverted, the paradox is averted. If we place silver/oil over gold/copper (for example), that would be roughly equivalent to the yield curve spread.

Does gold/copper resemble 10 year yields, though?

I would say it is a much less convincing performance, but I wonder how things would stack up if we could find a way to put the silver/oil ratio over the gold/copper ratio. Apart from that, what do we make of that huge spike in the gold/oil ratio in 2009? Or the gentle, undulating rise in the 1990s? Is this evidence that there is no connection between gold/oil and the ten year, or is this the market’s shadow 10-year rate? What would that even mean? How would it function?

So, as things stand, we have an oil/copper ratio that resembles the yield curve spread. We have a silver/oil ratio that resembles yields, especially short-term yields. And, we have this oil/gold ratio that is the most volatile ratio of them all and yet cannot be ignored. Copper would have to be somewhere in here.

But, so would gold/silver. This gold/silver ratio is now perplexing me the way the oil/silver ratio was torturing me before. What is it saying?

gold/silver ratio vs recessions

What does that peak in 1990/1991 mean? I can throw up the possibility that Japanese attempts at reflation caused a rise in silver that culminated in the Asian currency crisis of 1997; a renewed bout of deflationary pressures until 2003; and so forth. As I recall from Richard Duncan’s book, I think it was in 2003 that Japan attempted a Bernanke helicopter drop. But, how do we explain the sudden drop in silver/gold from 1983 until 1986 and the general move from 1980 to 1990? Even if my conjecture about the silver/gold ratio since 1990 were to hold up, that doesn’t really say anything about what the ratio itself represents. Does it somehow represent a build up of inflationary and disinflationary forces or systemic risk? Could the gold/silver ratio represent the difference between where the yield curve stands and where it should stand?

You can see from the Casey Research chart of the gold/silver ratio above that it kind of behaves like a yield curve spread does during recessions. If that is the case, then gold would behave like the 10-year while silver would behave like the short term rates. This makes it all the more curious that silver/oil should represent short term yields, even if oil’s price is inverted in this manner. Something like (gold*oil)/(silver*copper) would seem more appropriate. My need for data and ways to torture it is becoming more and more acute. I would really like to see the historical copper/silver ratio, especially as it relates to the volatile oil/gold ratio.

It feels like two steps forward, one step back, but it might be the other way around.


1 comment so far

  1. […] Commodity ratios and yields « Herodotus NowDescription : We have suggested that the oil/copper ratio has a close or perhaps leading relationship with the dollar/yield ratio and the yield curve. Finding historical charts of copper/oil and copper/silver is pretty difficult, … .. […]

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