Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Tuesday, June 18, 2013

Multistability in the gold-copper ratio

The gold copper ratio is commonly used to illustrate the state of the economy. Note that we usually take the ratio of the gold price per troy ounce and the copper price per pound. A recent graph of this ratio can be found here.

In past articles I have looked at how to study dynamic systems using reconstructed phase space portraits.

Here we see the reconstructed phase space of the gold-copper ratio over the past eight years, using a time-derivative method--plotting the value of the ratio against the average rate of change over six months. My convention is to plot the rate of change against the midpoint of the time window--for example, the last such calculation measures the change in the ratio from November 2012 to May 2013, and is plotted against the month-end price of February. This is why the graph ends at February even though we have month-end pricing to May.

There are three areas of stability in the above graph. In 2006 and 2007, the copper price rose dramatically, and the Au-Cu ratio fell, until there was a sudden pop in the economy in mid-2008, which is recorded in the figure above as a tremendous gyration lasting a year. The Au-Cu ratio settled for several months near the 350 level, before leaping to the 450 area, where it has remained for the past 18 months.

It could be that the economy as a whole was overheating in the middle of the last decade, what with all the demand for copper from China and the US housing boom. Then I suppose we returned to sanity.

Except the current economy doesn't feel sane to me.

The highs for copper in 2006 are not out of the ordinary. By inspection we can find numerous periods where the ratio was 200 or lower. In the late 1920s, Au/Cu fell to about 140, but when the depression hit, the ratio rose to over 400. In the wake of the post-war rebuilding, Au/Cu fell well below 100 and was still at that level when Nixon closed the gold window, although the pegging of the gold price and the military actions of the US both supported this low ratio.

More recently, we have the following . . .

. . . in which our hot, inflationary late '70s economy suddenly slowed. It helped that in the '80s the US wasn't involved in any wars of consequence (just little actions in Iran, the Sinai, El Salvador, Libya, Lebanon, Egypt,  Grenada, Honduras, Chad, the Persian Gulf, Italy, Libya again, Bolivia, the Persian Gulf again, Honduras again, Panama, Colombia, Bolivia, Peru, the Philippines, and Panama again).

Just after where I have ended the graph, the system returned to the area of stability at around 300, during the housing bubble at the end of the '80s. For a look at how terrifyingly huge it was, see below. ;)

So to my non-economically trained mind, the Au-Cu ratio only seems to fall below about 300 during credit-fuelled booms (and maybe during major postwar rebuilding phases). Presumably when it is higher than some level, we could say it indicates we are in a depression--but I haven't figured out what that level is yet. Early in the Depression, the ratio was at 400--but that was in the days of the gold peg at $20.

My gut feeling is that the present ratio is not far from depression levels.

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