Platinum/gold and bonds

I had decided after making yesterday’s summary to push on to other questions involving relatively peripheral metals such as aluminum, platinum, palladium, etc, and then other parts of the energy sector, before getting on to agriculture, and so on, but going back over my notes from earlier in the year, I came across a rather innocuous-looking equation that I perhaps should have paid closer attention to: platinum/gold = oil/gold.

Considering the added importance gold/oil is taking on (for me, if for no one else) and the timeliness of the bond question, it seemed worthwhile to return to our argument from yesterday and see if anything else could be learned.

Here are some charts that struck me as being relatively similar to the gold/oil ratio. On the other hand, assuming that the gold/oil ratio can do what we have been saying it can do, they don’t seem to have quite the same oomph. Interesting nonetheless.

This is gold/CRB index: I've put circles around places that roughly correspond with moves in gold/oil

since the crisis, at least, this has been more or less tracking gold/oil (or something else?); in previous years, euro/yen tracked copper fairly well

I had originally anticipated this to be a better model of 10-year yields, but lack of data prevents me from assessing that

Unsurprisingly, gold/copper looks a lot like gold/CRB. And, I suppose that it makes sense that yen/euro should look like gold/oil, since the yen is a safe-haven and the euro a toxic dump, almost as if the seizing up of Soviet bloc economies were finally bringing about contagion of the most bureaucratic and socialistic states of Europe. Slow-motion contagion.

That is another question, however. When I first recognized the similarity between precious metal/industrial commodity ratios and yields, I had thought that the two most critical would turn out to be gold/copper and silver/oil, and they still might, but I turned to gold/oil as a proxy for those two and was surprised at what I found. I won’t restate my argument on that question, however.

gold/oil ratio usually leads long-term yields by sixteen months

as of today, yields have apparently broken through the 2010 low

I should say, however, that when we use precious metals/industrial commodities ratios, it doesn’t do much to determine the magnitude of the change in bonds. If any ratio is likely to give some semblance of that magnitude, it is likely to be silver/oil, which we hope to look at in greater detail fairly soon.

But, let’s get to platinum. I have almost no idea what this commodity is used for. As far as I know, it resembles silver in that it is whitish and has properties both of a precious metal and an industrial, and that it resembles gold in being expensive. Why it should resemble the price movements of oil is a mystery to me and is a question that will have to wait for another day.

For our purposes, it presents a strange conundrum (if that is not redundant) and it mimics the gold/oil ratio.

if the March 2011 low turns out to be the cyclical low, it would be the least impressive low ever, but it is now heading higher

this is a nearly perfect reflection of the 10-year yield

why would treasuries think that they are the gold/platinum ratio?

Platinum/gold almost looks like a hybrid of oil/gold and 10-year yields. So, we have at least two ways we can look at this: either the gold/platinum ratio is some kind of by-product of yields (or vice versa) or we can use gold/platinum as a way to highlight those turning points in the gold/oil ratio. Each choice has drawbacks. If we went with one or the other, we would have to say that either our assessment of the last forty years–that gold/oil leadership was more prevalent than a concurrent relationship with yields–was erroneous or that gold/platinum had nothing to do with yields.

Is it possible to argue that both are true, however? That gold/oil or gold/platinum (although this would, like silver/oil require more careful scrutiny) are pushing yields sixteen months in advance and yet are also a product of yields concurrently? Indeed, that would seem to be the most likely solution. We suggested before that, when you take the three-year [edit: three-month] yield into account, the gold/oil relationship with yields appeared to be concurrent, but when taken separately, gold/oil ultimately seemed to lead the long end of the curve. Moreover, this would appear to confirm an intuitive truth, that the imbalances in the market are rooted in a reflexive relationship between gold/oil and interest rates, although one we are as yet unable to satisfactorily model or describe.

If that is the case, that there is an almost multi-dimensional relationship—not to get too mysterious—then we are justified to some degree in using gold/platinum as a way of highlighting moves in the gold/oil ratio. That would yield, therefore,

gold/oil ratio usually leads long-term yields by sixteen months

gold/platinum with gold/oil pivot points

can gold/platinum tell us about future yields, too?

From ‘point E’, gold/platinum is in very close agreement with gold/oil, but it gives what appears to be a slightly more robust interpretation of the imminent jump in yields into ‘point F’. If we can possibly make any predictions about the magnitude of that jump based on these charts, we would have to say that the move is likely to be very impressive, although we still do not know how low yields go in the coming weeks. Probably not as low as 2009, but it is difficult to be sure, and it doesn’t really matter, although the lower it goes, the more impressive the likely reaction to the upside in yields is likely to be, and by extension, the likelihood of a severe correction to gold lasting up to a year.

As a side note, and before we make some mention of the future of oil in light of today’s events, you may be curious, as was I, about the oil/platinum ratio. So, here it is.

oil/platinum ratio---I haven't seen anything that boring since...

oil/Australian dollar ratio

oil/copper

When the jump in oil comes, one might expect to see confirmation across these three ratios.

When will that come? Today’s new post-crisis high in the gold/oil ratio has a number of implications.

One, it takes us farther away from our prediction that the gold/oil ratio would fall to a post-crisis low before the end of the year.

Two, paradoxically, it increases the likelihood that we are on the brink of a surge in oil. Considering that we are forecasting a fall in bonds and in gold commencing in the next couple months, if not weeks, then this actually strengthens the case that appears to be threatened under the first point.

When the gold/oil ratio peaks, and our growing suspicion is that this could coincide with the jump in yields we have been blabbering on about, then it may indicate that we are at the front end of a ‘Leeb oil shock’ that could culminate in August of next year. It is worth noting in connection to the similarities between gold/oil and gold/platinum that the latter ratio went to parity just today.

Everything appears to be hanging on a break in the bond market and, more or less simultaneously, in gold.

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