Market chatter blames weakening Chinese demand, the Turkish economic collapse and possible weakening of world economic growth for the sharp drop in the price of industrial metals.

That doesn’t square with the observed facts. For one thing, China’s growth remains solidly in the mid-6% range, and China’s housing market – its most important source of copper demand – remains buoyant. There has been no change in global demand for industrial inputs in the course of the year, least of all from China, and certainly not from the US or Europe, where the latest industrial output numbers are steady.

Gold is a monetary metal first, second and third, and an industrial metal maybe fourth, and we observe that gold and copper have fallen in lockstep during the past several months.

Gold vs copper

Furthermore, we observe that both gold and copper are negatively correlated with the trade-weighted dollar index (DXY) during the past 20 months.

Gold and copper vs DXY

The collapse of the copper price by 20% from its June peak evidently is not an economic phenomenon driven by demand. Rather, it is an expression of risk aversion.

The world has gotten riskier during the past few months, for two primary reasons:

  1. There is a low-level trade war between the US and China underway that could turn into a high-level trade war; and
  2. The Italian elections put a bunch of unpredictable firebrands in charge of an economy with US$2.3 trillion in foreign debt and a dodgy banking system.

Heightened risk translates into a greater desire to hold cash balances (and that means a higher dollar, because most people pay bills in dollars and therefore hold cash balances in dollars). To get higher cash balances, market participants sell things like raw materials.

Turkey is utterly irrelevant to this shift towards risk aversion. The Turks may make the mistake of thinking that they matter but no-one else should encourage them. Turkey’s whole stock market is worth about US$30 billion at current prices, roughly the market capitalization of Monster Beverage Co. The big issues are European disintegration and Italian dyspepsia, and the US-China trade war.