The falling price of copper is trying to tell us something about a recession

Although you may not think of it often, copper is the third most consumed metal globally and is used across a variety of industries, from construction to elections, because of its resistance to corrosion and ability to conduct both heat and electricity. The metal is such a critical facet of the world’s economy that analysts often use it as a gauge of industrial and consumer demand as well as a recession indicator, giving it the nickname “Dr. Copper.”

Unfortunately, the patient was a bit worse for wear at their latest check-up with the doctor. Natalie Scott-Gray, a base metals analyst at broker StoneX, told the Financial Times Thursday that copper prices’ recent drop is a worrying sign for the global economy. “It’s the first physical evidence we’re seeing that demand is being impacted worse than expected in the west,” she said.

Chris Verrone, head of technical and macro research at Strategas Research Partners, pointed to the ratio between copper and gold prices as a way to “get a sense of what the market thinks about economic activity moving forward” in a recent research note. Because copper is used widely in the real economy, while gold is used primarily as a safe haven asset by investors, when gold prices rise in relation to copper, it can be a sign that businesses are spending less and investors are preparing for an impending economic slowdown. And “the copper-gold ratio has weakened, suggesting softer economic activity ahead,” Veronne explained in an email to Fortune.

A post-COVID lockdown economic recovery in China, the largest consumer of refined copper, was supposed to drive copper prices higher this year, but so far, the nation’s modest growth targets have failed to spur demand.

“The bullish scenario was all based on a China rebound which hasn’t materialized as we in the west suffer from an economic slowdown,” Al Munro, a metals strategist at the London-based broker Marex, told the Financial Times this week.

Bulls on parade

Despite the recent drop in copper prices, many analysts remain bullish about the future prospects of the metal, citing increased demand from electric vehicle manufacturers and a lack of investment into increased production over the past few years.

Simon Morris, head of base metals at the research firm CRU, told Reuters last month that copper producers will have to invest over $105 billion to build 6.5 million tonnes of new mine capacity over the next decade to help supply match rising demand.

Huw Roberts, head of analytics at the London-based research firm Quant Insight, explained in a Wednesday note that “Dr. Copper is already pricing in a fair amount of bad economic news” as well. According to Roberts’ A.I.-based model, copper is cheaper than it has been at any time since July of last year. That means a rebound could be in the cards—unless, of course, a true recession hits.

Billionaire mining investor and founder of Ivanhoe Mines, Robert Friedland, also told Bloomberg at the Qatar Economic Forum Thursday that he believes the current copper price downturn is only temporary and he remains “very bullish.” Friedland argued that demand for copper will be incredibly strong over the coming decades amid the green energy transition and rise of EVs. EVs can use up to 10 times as much copper as conventional cars, according to a 2022 report from the Copper Development Association.

“We’re facing a crisis for finding enough copper,” he said. “We think we need to mine as much copper in the next 25 years as has been mined in all of human history.”