Understanding the Influence of Copper on Silver Investments

Introduction

For many investors, gold and silver are considered to be closely linked. This perspective often leads them to analyze gold to predict silver's future price movements, and vice versa. While it's true that silver's price is heavily influenced by gold, the significant role that copper plays in shaping silver's price movements is often overlooked. This article explores how copper prices impact silver and how bullish trends in copper could potentially drive silver prices higher in the coming years.

Correlation Between Assets

Examining the correlations between two assets can provide valuable insights into their price relationship. As expected, gold and silver have a strong correlation—.771 over the past five years and an even higher .917 over the past year. However, the strong correlation between copper and silver—.725 over the past five years and an impressive .878 over the past year—is particularly noteworthy. This strong correlation is a compelling reason for silver investors to monitor copper as closely as they do gold.

Understanding the Silver-Copper Relationship

The strong price relationship between silver and copper is evident in long-term charts of the silver-to-copper ratio, which has remained remarkably consistent over time, despite periodic fluctuations. This close relationship can be attributed to factors influencing both supply and demand. From a supply perspective, silver is typically a byproduct of copper and other metal mining, such as lead, zinc, and gold. On the demand side, both silver and copper have substantial industrial applications, driving significant demand for both metals.

Comparing Silver and Gold

While silver is often grouped with gold, it differs significantly in its demand profile. The majority of silver demand (51%) comes from industrial use, compared to just 18% from investment. Moreover, the rapid growth in industrial demand for silver likely explains the rising correlation between silver and copper in recent years. In contrast, gold demand is largely fueled by investment (44.57%) and jewelry (48.74%)—with much of that jewelry also serving as a form of investment, especially in developing countries like India and China.

Sensitivity to Economic Cycle

Both copper and silver are far more sensitive to the economic cycle compared to gold. For instance, when a recession looms, both copper and silver prices tend to decline in anticipation of reduced industrial demand. Conversely, when the economic cycle is on an upswing, both copper and silver prices typically rise in anticipation of increased industrial demand. Gold, by contrast, is traditionally viewed as a safe-haven asset that investors turn to during times of crisis.

Impact of Trading Algorithms

The strong price relationship between silver and copper is likely amplified by trading algorithms that predict movements in one metal based on the price of the other, often creating a self-fulfilling prophecy. For instance, when copper begins to rally, certain algorithms will buy silver, causing both metals to rise in tandem. Although anecdotal, it has been observed that silver often tracks copper even more closely than gold, both on intraday movements and over longer timeframes.

Examining Recent Trends

As many are aware, gold has experienced a remarkable surge over the past year, climbing by $860 per ounce—a nearly 50% increase. Like gold, copper experienced a strong rally in the spring, but it peaked on May 20th and quickly reversed, unlike gold, which continued to rise. Copper bottomed on August 8th and has rebounded quite a bit since then and is now in a confirmed uptrend once again. Silver, like gold and copper, saw a sharp rally in the spring. Like copper, silver peaked on May 20th and experienced a sharp decline, though not as severe as copper's drop. Silver, like copper, bottomed on August 8th and has been staging an impressive recovery ever since.

Future Outlook

Along with bullish technicals, copper's fundamentals also point to a positive outlook. As the world increasingly embraces AI and “green” technologies such as electric vehicles, solar energy, and wind farms, demand for copper is expected to surge due to its essential role in wiring and other electrical applications. For example, copper demand in the transport sector is expected to rise 11.1 times by 2050 compared to 2022, thanks to electric vehicles that contain over a mile of copper wiring. Additionally, demand for copper to expand the global electricity grid is projected to increase 4.8 times by 2050. By 2030, a copper supply gap nearing 10 million tonnes is forecasted. All of these factors should be bullish for both silver and copper.

Bottom Line

In conclusion, the overlooked relationship between copper and silver plays a critical role in understanding silver’s price movements, alongside the more commonly recognized influence of gold. As copper continues to rebound, both technical and fundamental factors suggest that silver is poised to benefit as well. With increasing industrial demand, especially in sectors like electric vehicles and renewable energy, copper’s expected boom is likely to drive silver prices higher as well. Investors would do well to monitor copper closely, as its future movements may signal the next major leg up in silver's bull market. What are your thoughts on this analysis? Do you agree with the importance of monitoring copper for silver investments? Share this article with your friends and sign up for the Daily Briefing, which is everyday at 6pm.