Commodity specialists Standard Bank has recently completed a very interesting analysis looking at the ratio between the price of gold and that of several base metals since 1990. The bank is the first to hold up their hands and say the analysis does not look at market fundamentals on specific metals but it does provide a fascinating relative value analysis. Why choose to compare base metals to gold? To paraphrase the bank, it is because they see gold as a good indicator of global liquidity and the ratio of base metals with gold therefore indicates if prices reflect increased global liquidity or not.
So how do the base metals fair from this analysis? In the bank’s opinion, copper appears fairly priced relative to gold. Mapping back to previous downturns in 1998, the early 1990’s and 2002 they believe that on this measure copper should stay at current levels with a 19 year floor at $4,400/metric ton ($2.00/lb). As you can see in this graph (courtesy of Standard CIB Global Research) compared to the historic average and previous stock levels copper is comfortably middle of the road.
Zinc on the other hand appears cheap on a relative basis with gold. The bank observes stock levels have been rising but even when SHFE stocks and non LME deliverable stocks are added in, it would still not reach levels seen in 2003/4 when the ratio was higher.
On this measure there is room for the zinc price to rise relative to gold without breaking the long term ratio band.
And the other metals? Like copper, lead appears quite favorably positioned compared to past measures although it is close to the 19 year ceiling which suggests all other factors being equal it does not have further to go. Aluminum on the other hand, is well below the 19 year floor, but with visible stocks at record highs this is hardly surprising. Nor is Standard Banks conclusion that they do not view aluminum as undervalued relative to gold. Few, if any, observers would expect aluminum prices to move up sharply in the short term.