Image 2: The combined balance sheet of FOMC, ECB, PBOC and BOJ relative to aluminum and copper prices

Image 2: The combined balance sheet of FOMC, ECB, PBOC and BOJ relative to aluminum and copper prices
Source: Bloomberg

The next step is to get a sense of what the driver for this upward economic momentum could be. Since the Great Financial Crisis, it has increasingly been the liquidity provided by global central banks driving the economy whether we are in crisis or not. I created an index that looks at the combined balance sheets of the FOMC, ECB, PBOC and BOJ, all in dollars, and plots them over time. As indicated by the white line, these balance sheets climbed steadily from 2015 to 2018 before peaking. This is also when the economy started to show signs of a struggle. Then, when Covid-19 hit in 2020, the combined balance sheets shot higher, leading to a sharp recovering of the global economy, which can be seen in the Leading Indicators. Over 2022 and 2023, these balance sheets have been declining, however, as seen in late 2022, even when they perked up a little bit, the base metals responded. On this chart I am comparing the generic front month aluminum and copper prices. While these balance sheets have perked up a bit in late 2023, I haven’t seen much of a move in aluminum or copper. While the size of the balance sheet remains well above pre-Covid-19 levels, I see aluminum in particular moving back toward these pre-Covid-19 levels.


Image 3: OECD Leading Economic Indicators vs. generic front month aluminum and copper

Image 3: OECD Leading Economic Indicators vs. generic front month aluminum and copper
Source: Bloomberg

Image 4: Daily Ichi Moku charts for generic front month aluminum and copper


Image 5: Commitment of Traders report for aluminum and copper


Image 6: CVOL for aluminum


Image 7: CVOL for copper


Image 8: Term structure of implied volatility for aluminum and copper


Image 9: Implied volatility by delta surface for aluminum and copper


Image 10: Expected return for short 1-unit H1WH4 3.80 call vs. long 2 units of H1WH4 3.95 calls


Image 11: Expected change of vega for short 1-unit H1WH4 3.80 call vs. long 2 units of H1WH4 3.95 calls