Revoking Dr. Copper’s PhD: The Red Metal Doesn’t Correlate to the Overall Economy

by on

During last decade it became a universal truth that copper was an indicator of the world economy.

Free Download: Cut Your Copper Shipment Costs

Copper and equity markets tightly correlated from 2003 until 2011 and everyone simply assumed that they would continue doing so and, even worse, they assumed that they also correlated prior to 2003.

Copper (orange) vs S&P 500 (blue) 2003-2011

Copper (orange) vs. S&P 500 (blue) tight correlation 2003-2011. Source: MetalMiner

These assumptions led to the fallacy that came to be known as Dr. Copper, a metal whose price could be seen as indicative of more than its value with implications of the entire economy.

Correlation Does Not Imply Causation

As an analogy, we could argue that the Nigerian cuisine is healthier than the fast food we eat in US. Since people eat healthier we could expect people to be in better shape in Nigeria, get less diseases and, therefore, live longer than Americans. However, there are other factors that can affect the life expectancy of a country. In this case, poverty plays a bigger role than whether Nigerian cuisine is healthy or not. Giving Nigeria a low life expectancy compared to a wealthier nation such as the US.

Copper vs S&P 500. 1982-2015 (red highlight means periods with no correlation)

Copper vs. S&P 500. 1982-2015 (red highlight means periods with no correlation). Source: MetalMiner.

Copper (and other commodities) played a big role in the economic expansion of the the first decade of  the new millennium. Massive construction projects in emerging nations such as China, Brazil and the United Arab Emirates drove construction spending and world economies, in general, for most of the decade. However, in other periods, copper’s demand wasn’t as significant as other factors for the expansion of the world economy, like the growth of the internet in the ’90s.

More Factors Than Construction

Needless to say, there are many other supply and demand factors that can affect the price of copper and not necessary the overall economy, despite the strong correlation between construction spending and economic health in the ’00 decade. Looking back in time we can see that there were periods when the copper price moved in the opposite direction of equity markets (see period highlighted in red).

Now, it’s no surprise that since 2011 copper is not giving “good prescriptions.” Like many other well-known indicators, copper works sometimes and doesn’t in others. Therefore, copper has never been a reliable indicator for the overall economy.

Leave a Comment

