Excell with Options: Are Base Metals Positioned for a Rise?
Executive summary
- OECD Leading Indicators vs. the relative performance of aluminum and copper vs. gold
- The combined balance sheet of FOMC, ECB, PBOC and BOJ relative to aluminum and copper prices
- OECD Leading Economic Indicators vs. generic front month aluminum and copper
- Daily Ichi Moku charts for generic front month aluminum and copper
- Commitment of Traders report for aluminum and copper
- CVOL for aluminum
- CVOL for copper
- Term structure of implied volatility for aluminum and copper
- Implied volatility by delta surface for aluminum and copper
- Expected return for short 1-unit H1WH4 3.80 call vs. long 2 units of H1WH4 3.95 calls
- Expected change of vega for short 1-unit H1WH4 3.80 call vs. long 2 units of H1WH4 3.95 calls
Image 1: OECD Leading Indicators vs. the relative performance of aluminum and copper vs. gold
It has been awhile since I last sat down to write an Excell with Options about base metals. Before I dug into any sort of idea, I wanted to get my bearings. We know that these metals are relatively common in the Earth’s crust. However, these metals are also extremely important for the global economy, especially as we move vehicle production to aluminum and continue to electrify the economy, which drives a higher need for copper. My first stop when I wanted to get a sense for the underlying dynamics was to look at these metals compared to the OECD Leading Economic Indicators. I normalize both copper and aluminum by dividing them by the price of gold to take out any FX impacts, since there has been a bit of volatility in FX in the latter half of 2023. When I look at this chart over the past 10 years, I can see that the Leading Economic Indicators do a good job of forecasting the direction of the base metals relative to the price of gold. In fact, these indicators are pointing higher at a time when the base metals are still relatively languishing.
Image 2: The combined balance sheet of FOMC, ECB, PBOC and BOJ relative to aluminum and copper prices
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.