Copper/Gold Ratio Trading Strategy- Backtest, Performance, Statistics

The Copper/Gold ratio trading strategy seems to offer good entry points for both copper and gold. We backtest the ratio and find positive results for the next one to 12 months after a signal is triggered.

Copper and gold are two of the world’s most known and traded commodities, and both are frequently mentioned when inflation and the economy are discussed. Gold is linked to inflation, while copper is linked to the overall economy.

Let’s dive in and explain the trading strategy, backtest, and results. At the end of the article, we show you the complete Python code we used to do the backtest.

Key takeaways

• The “Copper/Gold ratio” is simply the price of copper divided by the price of gold.
• The rationale: copper is a broadly used industrial metal (so its price is sensitive to economic activity), whereas gold is more of a safe-haven asset, sensitive to inflation, uncertainty, and interest rate dynamics.
• Thus, the ratio serves as a barometer of cyclical risk versus safe-haven demand (i.e., growth versus uncertainty).
• A rising copper/gold ratio suggests industrial demand and growth are strong (copper doing well relative to gold) → “risk-on” / growth environment.
• A falling ratio suggests economic slack or risk aversion (gold outperforming copper) → “risk-off” / safe-haven environment.
• The article notes that many analysts link the ratio to yields (e.g., the U.S. 10-year Treasury yield) and macroeconomic expectations.
• For copper: after the buy signal, average returns are positive for all holding periods (1-12 months). The article states the signal was very strong except for one year (2019) where after 12 months the return was only about +2.2%.
• For gold: using the same signal (the ratio crossing below threshold) also yields positive returns, though “not as good” as for copper in their tests.
• They note the signal “wasn’t triggered many times” over the sample — the infrequent signals mean fewer opportunities but when triggered the results were powerful.
• Strength: This is a simple rule, easy to implement (just monitor one ratio, one threshold), with positive historical results in the backtest.
• Caveats:
  • Few triggers → statistical confidence may be lower.
  • The ratio’s predictive power may be regime-dependent (global economy, commodity cycles, monetary policy) — the article doesn’t claim it works in all environments.
  • Backtest results do not guarantee future performance.
  • Implementation issues: if one is trading copper and gold futures or ETFs, consider liquidity, roll costs, transaction cost, timing of entry, etc.
• Implication: For someone trading commodities (or using commodity signals as part of a macro or trading system), the copper/gold ratio offers a potentially useful timing indicator: when the ratio is very low, that may signal good entry points for both copper (and to a lesser degree gold) according to the study.

What is the Copper/Gold Ratio?

The Copper/Gold ratio is simply the price of copper divided by the price of gold.

What is the relationship between copper and gold?

The relationship between copper and gold is weak or low, but they both tend to move together. When the copper price goes up, it might put pressure on the inflation rate and interest rates, while gold might go up at the same time because of the same factors.

Copper is a key industrial metal that is used in a wide range of products we use on a daily basis, for example, building construction and electronics. The copper price goes up when the economy is hot, and is therefore used as a barometer of economic activity. When the activity is high, inflation has historically picked up. We also need to mention that the copper price is far more volatile than the gold price.

When the price of gold goes up, it’s because inflation expectations go up. Gold tends to go up when geopolitical tensions increase, as well.

Why is the Copper/Gold ratio important for traders?

The Copper/Gold Ratio is important for traders because copper is an indication of industrial activity and demand, while gold is a safe haven asset with almost no industrial use.

Thus, it compares industrial demand and the price of a safe haven asset that is very sensitive to inflation and interest rates. Financial pundits mention the Copper/Gold ratio as a leading indicator for US Treasury yields, and research we have perused seems to confirm that view.

However, we are not going to backtest Treasury yields but to find out if we can time when to buy copper and gold.

Copper/Gold Ratio Trading Strategy – Explanation

Why should the Copper/Ratio work as a timing indicator for copper and gold?

Copper is sensitive to changes in global economic activity, while gold is often considered a safe-haven asset in times of economic uncertainty. Thus, when copper falls too much, like in 2008, the signal is triggered.

Copper/Gold Ratio Trading Strategy – Backtest

A trading strategy needs to have specific trading rules, and we make the following trading rules:

• The signal is triggered when the Copper/Gold ratio is less than 0.19 for the first time in 1 year.

Here is the historical chart of the copper price and the respective buy signals from the copper/gold ratio trading rule (from year 2000 until today):

As you can see, it seems like the signal generates very good entry points. The following table shows the performance ranging from one month to twelve months after the buy signal was triggered:

The average return is positive for all periods. Moreover, the signal was very strong and generated large returns at all times except in 2019, where it rose only 2.2% after 12 months.

And what about gold?

We use the same buy signal for the gold price. Below is the historical gold chart and buy signals from year 2000 until today:

the first impression is that the returns are good, but they are not as good as for copper. Here is the table showing the returns for gold for one month up until 12 months after the buy signal was triggered:

The returns are positive and impressive, although not as good as copper. 

Copper/Gold Ratio research

Tai Roh, Dongoon Kim, Sun Yoon, and Yu You performed a study called When Gold Meets Copper:  A Comprehensive Look at the Informative Role of the Relative Value of Gold on Global Stock Markets.

The study comprehensively examined the information content of the relative value of gold, particularly focusing on the Gold-to-Copper ratio, to predict future stock returns on a global scale.

The key conclusions are:

• Robust Predictor: The Gold-to-Copper ratio demonstrates robust predictive power for short-term stock returns, specifically across 3-month to 12-month horizons, in numerous developed stock markets and global markets.
• Predictability Amplified by Economic State: This predictive power increases during recessionary periods, aligning with gold’s traditional role as a safe-haven asset.
• Role of Copper: The ratio’s ability to predict returns extends beyond recessions into times of economic expansion, due to copper’s unique role as an industrial metal reflecting overall economic growth.
• Economic Value: Rigorous tests confirmed the consistent predictive capability of the Gold-Copper ratio across various scenarios, leading to significant economic gains for trading strategies based on its forecasts

Copper/Gold Ratio Trading Strategy – Conclusion

To sum up, today we showed you a signal with very strong predictive power about the future performance of copper and gold. Although it wasn’t triggered many times, the times it did proved to be very powerful.

Copper/Gold Ratio Trading Strategy – Python code

For your convenience, we provide you the complete Python code for the Copper/Gold Ratio trading strategy backtest: