Trading techniques... listen to Dr. Copper

Many traders have been pointing to the recent rise in copper prices as evidence that the outlook for global growth is positive. “Dr. Copper” has long been deemed a leading indicator of the global economy. The idea is that since copper is used for a wide range of industrial and consumer goods, as well as in the construction industry, rising prices suggest that firms are buying it in anticipation of increasing output.

Studies indicate that there is a relationship between growth and copper consumption. A 2013 study found that between 1966 and 2010, there was a correlation between growth and copper consumption in 16 countries. Work by the Bank of England in 2018 also found a strong relationship between global economic growth and total worldwide growth in metal consumption between 1981 and 2016. It estimated that changes in industrial metals’ prices can help predict changes in global GDP up to three months in advance.

But it also cautions that while growing copper consumption can suggest that the global economy is doing well (while falling demand for the red metal implies the opposite), the link between copper price and shares is not always that strong, as copper prices are dictated by supply as well as demand.

For instance, traders are now betting that problems in the smelting industry will keep prices buoyant, even amid weak Chinese demand (China accounted for just over half of global copper consumption in 2023). Note too that the link between copper consumption and US stocks is much weaker than it was thanks to the relative decline of US manufacturing.