Image 1: Aluminum price in terms of gold and copper price

Image 1: Aluminum price in terms of gold and copper price
Image 1: Aluminum price in terms of gold and copper price
Source: Bloomberg

I have two charts up on my computer that I routinely go through. I learned early in my career that the best traders, even outside of the commodity complex, like to look at these industrial metals (ALE1 and HG1) priced in terms of gold (GC1) in order to take the FX effects out of the price. Thus, a trader might be able to ascertain a solid view of the commodities market’s sense for supply and demand. Since May, as both of these measures have shown extreme weakness, it has led to a number of commentators wondering if the global economy is entering into a period of meaningful economic slowdown.


Image 2: Aluminum priced in gold, copper priced in gold, U.S. ISM Index and China’s Li Keqiang Index

Image 2: Aluminum priced in gold, copper priced in gold, U.S. ISM Index and China’s Li Keqiang Index
Source: Bloomberg

Ideally, a trader would like to compare these two futures markets’ measures to a global GDP to see how closely they match the actual economic output. After all, the latest GDP reading in the U.S. was 5.2% in nominal terms, while it was 4.7% in China. That might sound like reasonable economic growth to many. Interestingly, those measures do not correlate well with the futures market. Instead, I have found that the U.S. ISM (orange) and the Chinese Li Keqiang Index (yellow) do a much better job. The ISM is a survey of business conditions in the U.S. and it coincides with asset markets while GDP lags. There have also been criticisms of the Chinese GDP, which is why I use the Li Keqiang Index on Bloomberg. When he was Premier of China from 2013-2023, a reporter asked Li about GDP. Li said he did not like the man-made data but preferred real measures like rail traffic, electricity consumption and bank lending. Bloomberg put that index together. A trader can see that both the ISM and Li Keqiang do a good job of tracking the futures markets, if not leading them. To me, both suggest there could be downside here even though the narrative is about a soft landing and rate cuts now in the U.S.


Image 3: Generic front month Aluminum and Copper futures contracts Ichimoku charts


Image 4: CVOL for Metals markets


Image 5: CVOL and skew for aluminum and copper


Image 6: Commitment of Traders for Aluminum and Copper futures


Image 7: Implied volatility surface for Aluminum and Copper options


Image 8: CVOL for aluminum and copper


Image 9: Expected return for buying two September Aluminum 2275 calls


Image 10: Expected return for selling one September Copper 4.19 call