Bitcoin Bulls Cautioned as ‘Doctor Copper’ Declines Compared to Gold

The recent decline in the copper-to-gold ratio, hitting its lowest point since November 2020, is signaling bearish trends for risk assets, including cryptocurrencies. This drop also hints at the likelihood of lower interest rates in the near future.

Market observers have noted that the introduction of bitcoin spot ETFs in the U.S. has sparked substantial mainstream interest, potentially worth billions of dollars, fueling a positive long-term outlook for the cryptocurrency. However, the realization of these anticipated gains hinges on economic developments. Therefore, investors are advised to closely monitor key macro indicators such as the copper-to-gold ratio, which is currently on a rapid decline, indicating a negative outlook for risk assets like cryptocurrencies.

The copper-to-gold ratio, calculated by dividing the market price per pound of copper by the per-ounce price of gold, has plummeted by over 8% this month, reaching its lowest level in almost a year. This ratio is significant due to copper’s close association with industrial activities, earning it the moniker “Doctor Copper” as a gauge of economic vitality, while gold is traditionally viewed as a safe-haven asset.

Investor sentiment towards risk and growth-sensitive assets, such as technology stocks and bitcoin, versus safe-haven options like gold and Treasury notes, is often reflected in the relative valuation of copper and gold. Established market players like DoubleLine Funds closely monitor this ratio for insights into the demand for risk assets.

According to MacroMicro, the copper-to-gold ratio tends to rise during periods of global economic expansion and stock market growth, while economic uncertainties typically lead to increased demand for gold as a hedge, causing the ratio to decline. In essence, if the falling copper-to-gold ratio persists, it could potentially trigger downside volatility for bitcoin.

Furthermore, the historical correlation between the copper-to-gold ratio and interest rates suggests that the current downtrend in the ratio may foreshadow a renewed decline in interest rates, particularly the 10-year Treasury yield. Analysts at DoubleLine Capital anticipate a downward trajectory in the U.S. Federal Reserve’s benchmark interest rates over the coming years.

Despite the initial market jitters prompted by the copper-to-gold ratio’s movement, lower interest rates could eventually stimulate a search for higher yields, prompting a resurgence of capital inflows into risk assets like bitcoin, akin to the post-pandemic recovery witnessed after the March 2020 market crash.