Modeling copper and searching for oil/gold

I have been disappointed about how far away I am from figuring out the oil/gold ratio, never mind why it has the ‘effects’ or implications that it does. Today, though, after finally pinning down the gold/copper ratio, I thought I could smell oil/gold, and I sense that it is right under my nose, but try as I can, I cannot model that ratio yet.

Before I tangle with oil/gold, though, I just wanted to nail down gold/copper, since yesterday’s post was rather confusing.

These are the equations I have found, although I am not going to chart the ones I have already charted again.

The central one is,

gold/copper = dollar/yield

And, the following are derivatives of the central equation.

gold =  (copper * dollar)/yield

copper = (yield * gold)/dollar

dollar = (gold * yield)/ copper

yield = (copper * dollar)/gold

Also,

gold/copper = dollar * bonds

bonds = gold/(copper * dollar)

gold = bonds * copper * dollar

copper = gold/(bonds * dollar)

dollar = gold/(bonds * copper)

While I was trying to untangle oil/gold, it occurred to me that I had the data to chart the copper equation, which I did with some hesitation. I have data for the dollar index, gold, and the ten-year yield for the period from 1995-2008, and this is what I found.

This is what my copper model suggests the level of copper 'should' have been

copper from 1970

I wish I could construct better charts, and I wish I had the data to run the other equations, but I think you can see that my copper equation is correlated pretty tightly with the copper price from the period.

I also ran the copper equation against gold and oil, to see what I could see.

copper equation vs oil and gold

I think the equation works better with copper, but it appears to reflect commodities in general. Oil bottoms before the copper equation does, but the equation does seem to pick up on the first half of the 1999 oil spike, but it doesn’t catch the 2000 move upwards, which was the period when oil/gold momentously crossed 0.12. In other words, I need to find that something that catches oil’s upward move in that year. In any case, I think this will be useful (some day) to get at an oil equation and, most importantly, an oil/gold equation.

***

I would think that the 2000 action is somehow related to the yield curve inverting, but I am not sure, and I cannot figure a way to formulate it. I have all these equations, some of them more solid than others, and somewhere in there lies oil and oil/gold, but I can’t put my finger on it.

We have gold/copper = dollar/yield, which is almost unbelievably sound, and a number of derivative equations, the one of which I have attempted to check appears to work quite well.

We then have the oil/copper = 10-year yield/3-month yield, i.e., the yield curve spread, but the relationship is not perfect.

We have another weakish equation, gold/silver = 10-year yield/3-month yield, that is suggestive but not much more.

There is the rough parallel between silver/oil and the the 3-month yield.

And, we have a vague relationship between oil/gold and copper/silver.

And, finally, gold/copper = silver/oil, except only in a very general way, and not so that you could plug silver/oil into the dollar/yield equation.

Part of the problem is that gold/copper = dollar/yield works so well that it seems like a self-contained system, and yet it is hard to imagine that oil and short-term rates are not to be found in here somewhere. And, what on earth is silver doing? It seems very possible that most of my problems are stemming from silver rather than oil.

Anyway, another way of thinking about it is to consider Kevin Klombies’s equations. If I make reference to his work so often, it is because I don’t know of anybody else who is doing quite what he does. And, if they are, they are hidden from the searching gaze of Google. Klombies has been modelling gold = bonds – dollar. (To be precise, that gold is the inverse of the dollar – tbonds). I use ratios rather than subtraction and addition, as much out of necessity as principle, and yields more than bond prices, so in my language, I would say that Klombies’s formula is gold = dollar/yield.

I have tried to modify that by showing that gold/copper = dollar/yield. The other equation of interest that Klombies models is copper + (3 x oil) is the inverse of bonds + dollar. In other words, copper + (3 x oil) = – bond – dollar, or copper + (3 x oil) = yield – dollar.

Changing this to a ratio equation, we get, copper * oil = yield/dollar. If that is true, however, then copper/gold = copper * oil, which leaves us with the odd equation, oil = 1/gold, or gold = 1/oil.

Setting that aside for the moment, Klombies also suggests that oil/gold = the 10-year yield. Which, can be expressed as oil = yield * gold, or gold= oil/yield. Over the long haul, this doesn’t seem to be the case, however.

Probably, somewhere on this page, the solutions to oil and oil/gold and possibly silver are probably staring at us with mind-numbing obviousness, but it escapes me for the moment, and I will have to sit on the question for the time being.

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