The ‘Dr. Copper and Fearful Gold’ indicator says it’s a ‘stellar’ time to buy stocks

Sep. 25, 2022 9:00 AM ETCopper Futures (HG1:COM), XAUUSD:CURSPY, GLD, IAU, GDX, CPER, JJCBy: Jerry Kronenberg, SA News Editor109 Comments

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The “Dr. Copper and Fearful Gold” indicator is pointing to rising investor confidence and “stellar” stock-market returns ahead, Leuthold Group Chief Investment Strategist James Paulsen says.

Paulsen wrote in a recent note that the indicator, which measures the ratio of copper prices (HG1:COM) to gold prices (XAUUSD:CUR), serves as a good proxy for investor sentiment thanks to what each metal’s value signifies about the economy.

He said copper prices (HG1:COM) historically represent a leading economic indicator, as many industries use the metal in production. By contrast, gold prices (XAUUSD:CUR) typically go up when investors fear high inflation, recession or excessive market volatility, Paulsen said.

As a result, “the ratio of those two prices is a good gauge of relative confidence in the future vs. fear - or, essentially, stock-market conviction.” Paulsen wrote.

Right now, the Dr. Copper and Fearful Gold indicator is sitting at just its 13th percentile when measured in historic terms stretching back to 1990:

Paulsen said that means “the comparative cheapness of confidence to fear” is lower than it’s been 87% of the time over the past 32 years.

“Outside of the 2009 market bottom, the pre-Trump election low in 2016 and the pandemic trough, confidence has never been any cheaper vs. fear than now,” he wrote. “When the copper/gold ratio has been in its lower quartile (like today), forward stock market returns were stellar.”

Paulsen said that since 1990, the S&P 500 (SPY) has risen at a 21% annualized rate over the next month any time the indicator has been at its 25th percentile or lower, as it is today. By contrast, the blue chips only gained a 5.3% average annualized rate of return in months when the index sits above the 25th percentile mark:

As for downside risk, Paulsen wrote that the S&P 500 (SPY) historically declined just 28.6% of the time over the coming month at any time when the Dr. Copper and Fearful Gold indicator was in its bottom quartile. By contrast, the blue chips have had a 38.8% chance of declines when the indicator sits above its 25th percentile mark.

“Historically, when confidence has been this cheap compared to fear, it proved to be an excellent time to buy the stock market,” the economist said. “Excessive fear and extreme undervaluation of confidence have historically tended to brighten the outlook for stocks.”

Popular gold ETFs include the SPDR Gold Trust ETF (GLD), the iShares Gold Trust ETF (IAU) and the VanEck Vectors Gold Miners ETF (GDX).

Popular copper ETFs: The United States Copper Index Fund (CPER) and the iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC).

For more macro market analysis, click here.

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