Natural gas

Yesterday, I attempted to write a post about natural gas, but I never felt like I could establish any really solid relationships beyond the post-crisis conditions. Perhaps some of those more recent relationships will form the basis of some future consideration, but I would like for most of my thoughts about intermarket relationships to tend toward longer-term trends rather than to the temporary. Kevin Klombies’s bold thesis about bonds and commodities presented in the IMRA today and the connection to natural gas encouraged me to strike out once again for oil’s less famous cousin.

So, any consideration of longer term relationships requires me to turn to my old standby, P&F charts. You have been warned, so “he which hath no stomach to this fight, Let him depart; his passport shall be made, And crowns for convoy put into his purse; We would not die in that man’s company/ That fears his fellowship to die with us.”

And, so, once more to the breach, dear friends.

As dissatisfying as all my tomfoolery with natural gas yesterday was, it did suggest a few possibilities for long-term consideration, and I would like to try to connect those somewhat with Klombies’s very interesting argument today.

Here is the natural gas/platinum ratio compared to the oil/copper ratio.

Natural gas/platinum ratio

oil/copper ratio

We have already spoken a great deal about the oil/copper and copper/oil ratios, a relationship I first became aware of through Kevin Klombies when I first tried to make sense of the oil/gold ratio. In any case, if you are familiar with Klombies’s suggestions about the copper/oil ratio, then the natural gas/platinum ratio should strike a chord.

In Klombies’s construction of the copper/oil ratio’s range, it tends to work around 5:1 and 3:1 as the extremes, with 6:1 and 2:1 being the outermost. If we were to attempt something similar with the platinum/natural gas ratio, it would come out to something like 180:1 and 90:1 as the key markers on the high and low ends, respectively. But, then that creates the awkward condition of having a ratio at something like 400:1 today. Moreover, if the platinum/natural gas ratio were to operate on similar principles to the copper/oil ratio, then we would have to expect most of the reduction of that ratio to come from the natural gas side. In short, an explosion in natural gas prices would be necessary.

Let’s leave that speculation aside for the moment, however, and reconsider the ratios above. If there is a relationship, then they ought to withstand at least a modicum of mathematical rigor.

Therefore,

Natural gas/oil ratio

platinum/copper ratio

By and large, the proportions do not match up especially well, but the highs and lows appear to generally correlate. Interestingly, both of these ratios have been stuck down in the doldrums. One of the things that seemed to suggest themselves yesterday was a general correlation between natural gas, platinum, and the Dow, and in the sense, these charts express the Dow’s inability to gain any altitude over commodities.

Before I move on to a consideration of the near term charts, I should also note that in previous posts, I had linked together the platinum/copper ratio with gold/silver.

gold/silver ratio

Although the ratios tend to morph from one comparison to the next, there are some underlying forces that to one extent or another draw these ratios together.

The silver/oil ratio, another one we have talked about with some excitement in previous posts has a fairly strong resemblance, as it turns out, to the gold/natural gas ratio, as the above charts suggest. It is somewhat ironic that my first attempt to make sense of natural gas last year kept on pointing me to some relationship with the oil/gold ratio, but it would appear to be a slight variation of that.

gold/natural gas ratio

silver/oil ratio

This takes us almost first circle back to our hypothesis about the 16-month advance the silver/oil and/or gold/oil ratios have on yields. Unfortunately, P&F charting are terrible at representing time, so we’ll have to stick with the shorter-range charts.

Let’s go back up to the relationships we mentioned at the top and work our way back down once again.

natural gas/platinum ratio

oil/copper ratio

Although I tend to think of natural gas as being even more volatile a commodity than oil, on this chart, it seems comparatively sane. It might serve as a useful tool in trying to gauge just when the oil/copper ratio is ready to break back to the upside.

oil/natural gas ratio

copper/platinum ratio

silver/gold ratio

I have flipped these ratios here, because I wanted to consider what I’ve found in relation to Kevin Klombies’s mention of the oil/natural gas ratio. If he was right about the relationship between oil/natural gas and yields, then each of these ratios is promising low interest rates at the moment. On the other hand, we have also seen these ratios break their trend lines downwards, perhaps suggesting the interest rates promised by precious metal/energy ratios are not far off now.

silver/oil ratio

gold/natural gas ratio

One wrinkle here is that if gold/natural gas bears some relationship with silver/oil while silver/oil front-runs yields, then gold/natural gas offers a slightly confusing picture, if one takes the peaks seriously. One thing to note is that the peaks in the gold/natural gas ratio appear to follow silver/oil peaks by about five months, although it is difficult to tell if that is really happening. If there is anything to it, then one would have to imagine the silver/oil spike of April would have to show up in the gold/natural gas ratio by October. Coincidentally (?), gold/natural gas has been surging the last couple months, but then again, so is silver/oil again.

Is there any way to reconcile all of this, then? Klombies has argued, to repeat, that the oil/natural gas ratio can tell us something about the behavior of bonds and that for any top in bonds to occur it will most likely have to come about with a drop in oil/natural gas. The conditions for that move do not appear to be present at the moment, but the violation of the trend lines of the ratios identified above suggest that this top may be approaching.

To pile speculation on top of that, it has struck me that platinum, natural gas, and the Dow have a rough correspondence, and that the relative weakness of these markets may now be coming to an end. Is it possible therefore, that we could see a period of relatively strong bonds over the next five or six months, along with a rising Dow/gold ratio and stronger platinum and natural gas, followed by a top in bonds sometime early next year?

This would not exclude some kind of top for bonds in the very near future, but the question that has plagued us regarding yields is, how high will they bounce? And, if they are to put a stop to gold, then they must move up further than copper, at least on a relative basis. But, if yields were to move up only marginally and that were enough to stomp out the gold rush, then that implies weak copper and industrial commodities in general, except say, platinum and energy, especially natural gas? One would also have to suspect a crushing blow to silver that would have every gold-cum-silver bug screaming “Conspiracy!”

I still feel that there is too much evidence suggesting a top for bonds approaching in the near term, but I still have no way of gauging magnitude. At all events, if precious metal/industrial commodity ratios ever had anything to say about yields in 16 months time, then they are screaming in unison that yields will go up significantly over the course of 2012.

Energy looks increasingly promising, as well. But, by and large, it is still difficult to completely square what Klombies has suggested and I have partially corroborated with what I have found over the last week or so, unless oil is ready to throttle copper—or, if I have missed a step somewhere. There seems to be an important piece of the puzzle in here, but not enough to solve the problem yet. The wisest course of action would appear to see how the moving averages of the Hang Seng resolve, as Klombies has effectively suggested.

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