Dow/platinum ratio and other goodies

I would like to draw together everything we have talked about this week in order to update the picture as we found it at the beginning of the week and to practice looking at markets with as synthetic an outlook as possible. Let’s call it ‘intermarket synthesis’, or what might be more accurate, ‘putting all your eggs in one basket’. First of all, let’s talk about the stock market and the Dow/gold ratio.

The level of the oil/gold ratio has been screaming for a good, oh, fourteen or fifteen months that the Dow/gold ratio will fall, but Dow/gold has not obliged. After having held above eight for that period, in the last month, it has plunged to as low as six, the lowest since the early 1980s.


Nearly a week ago, we wrote that we expected the bond market to begin to give way in coming weeks, although with a strong possibility that yields would fall below their levels of last year and even the year before that in the meantime. The new lows have been achieved, and although it remains to be seen just how low they can fall in the wake of the Fed’s announcement that it would hold interest rates down for the next two years, this strikes me as the perfect set-up for a collapse in bonds. If and when that low in yields is reached, there will hardly be any other direction to go but up.

But, will they go up fast enough to cripple gold? And, what might any of this say about the Dow/gold ratio?

Again, the argument we have been making is closely linked to Gibson’s Paradox, which is the nigh-well ancient observation that prices have a powerful positive correlation with interest rates. When interest rates are held below their natural level, this will cause commodities, particularly precious metals like gold, to go up. The obvious conclusion, I suppose, is to assume that gold will go parabolic in the wake of the Fed’s announcement, but the lower yields fall between now and the bottom, assuming the bottom has not already been achieved, the greater the impact of even a relatively minor bounce.

It is worth noting that copper has held up fairly well over the course of the latest stage of the agricultural inflation and sovereign debt crush this year. Let’s say that as thing settle down, copper moves up to $5.00 from its current $4 or thereabouts. A nice 25% gain, but if yields move from 2% to 3%, that is a 50% gain and one that is likely to send a cold shiver down the gold market’s spine. Now, I have no idea what the copper market is going to do, although I believe it is ready to advance, and I have no idea how much bonds could fall once they pivot, but it seems to me that there is less in the way of resistance to yields than there is to copper.

But, let’s look at the charts to look at where things stand.

Dow/10-year bond ratio

yield/dollar ratio

We have already gone on and on about the copper/gold ratio and its relationship with the dollar and bonds. And, now we’d like to combine this with the Dow/bond ratio. The similarity here seems to be confirmed by the mathematical variations of these implied equations.

For example,

Dow/copper ratio

30-year bonds/gold ratio

These charts tell us a couple of things. One, the Dow has been ‘growing’ on the back of dollar weakness, and if it is going to start carrying its own weight, this will require relatively strong copper, relatively strong bonds, and relatively weak gold. It does not tell us what will happen—that is left to our fertile or febrile imaginations to conjure up—but if yields are about to break strongly to the upside, as we have argued, then this may finally get the Dow/gold ratio moving north again.

Everything hangs on the bond market and, to a slightly lesser degree, copper.

But, while we are waiting for this supposedly ‘imminent’ turn around to happen, can we speculate on where we might see such a move first?

the ever faithful copper/yield ratio

This is at the heart of everything. So long as yields are relatively weak, it is difficult to see how the current pattern can break down.

What else?

A break in the gold/oil ratio.

gold oil ratio

The similarities between now and the late 1990s are rather striking, although there are divergences. Then, it was rising agricultural and energy prices putting the squeeze on Southeast Asia and causing economic and political dislocation there, as well as debt problems in other developing markets that came to threaten the global financial system, prompting fears of deflation. In this instance, many of the same factors have played out around the Mediterranean in the form of political upheaval and debt crises. The oil price surge that has apparently triggered the market weakness this year can be said to have been the equivalent of an inflationary hot potato. Developed countries pump money into the global economy, developing countries pay the price in terms of food and other forms of agricultural inflation, as well as higher commodity prices in general. Aging regimes struggle to keep up with the strain on their budgets in a world with fewer opportunities to grow through exports and topple when they can no longer provide the goods. When this happens in the Middle East, that inflationary pressure is transmitted through fears of instability to higher oil prices.

If oil is about to surge, whether priced in dollars or in gold, and stocks are, as well, can we expect to see a return to the technology sector, just as in the late ’90s and earlier this year?

Nasdaq/Dow ratio

But, to return to where we began this post, are there any other places we can expect signals for a change in the them of the last 14-15 months?

platinum/gold = Dow/gold?

When platinum/gold reverses—a lot of mention has been made about these two ratio hitting parity this week—it would seem not unreasonable to expect stocks to party like it’s 1999. Platinum/gold has been tracking Dow/gold pretty tightly for the last couple years.

Which brings us back full circle to the question of bonds. In a recent post, we mentioned the strong positive correlation between platinum/gold and yields. If, based on a number of cyclical factors, yields are expected to pivot soon and platinum/gold is approaching a key pivot point of its own, then this would seem to be bullish for the Dow and possibly bullish for the Dow/gold ratio. Not to mention the critical levels gold/oil is reaching.

But, there is still a huge piece missing from this puzzle: silver. I still don’t know how to make sense of it. It would be foolish to think that it’s not saying something, but what? The parabolic bubble it blew in the spring was an unwinding and/or creation of some tension in the market, but what precisely?

Silver has managed to maintain its support against every other major commodity we have been studying here, except for gold.

My hunch—and it’s nothing more than a blind stab at the question—is that silver’s rise over the last year or so is in some way a manifestation of the energy that was ‘supposed to’ have been transmitted through the stock market.

If platinum/gold is a reasonable estimation of the Dow/gold ratio (although this would require a look farther back than just the last three years), then silver—assuming this hunch has any merit—would be a function of gold/platinum.

gold platinum

silver/copper ratio

Does the breakdown in silver somehow presage a coming breakdown in gold? Might we see [silver] slip below support levels when gold finally gives up the ghost?

silver/platinum a canary in the coal mine for PMs?

Right now, though, it seems like there are worse places to put your money than platinum. [Note: That is not investment advice any more than when the President of the United States or other public officials urge investors or citizens to sink their money into American treasuries and other investment vehicles. It is just another pontification founded on unsound thought.]

It is probably for the best that an attempt at synthesis should degenerate into a mumbling series of ill-considered conclusions and half-questions. The fact that silver is such a mystery should be a warning to us about how dangerous it is to come to any conclusions founded on a supposed ‘intermarket synthesis’. But, the question now appears to be, if markets as a whole begin to bottom and start the slow slog up again as they have over the course of the last year, without any change in the Dow/gold dynamic that has been in place for over a year now, will silver resume its parabolic ways?

Our eyes should be on the copper/yield ratio primarily, but you might want to keep your eye on silver/platinum, too, among other silver ratios and the vast assortment of ratios we have now gone through in this post.

One last chart that I found interesting, and that might be significant is the Dow/platinum chart.

Dow/platinum appears to have reached a critical level today


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