Look! Something Shiny! It’s a Platinum/Gold Spread!

Platinum/Gold Spread

Gold and platinum are two highly-correlated precious metals. However, while gold is considered a precious metal, platinum is both an industrial metal and precious metal.

Platinum Gold overlay monthly

Platinum Gold overlay monthly

The biggest source of demand for platinum is for usage in catalytic converters. So even though the prices of platinum and gold have historically been highly correlated, the variance in the fundamentals have still allowed for some price divergences. That makes for some interesting trading opportunities.

‘Even Money’ Spells ‘O-P-P-O-R-T-U-N-I-T-Y’

Platinum normally has a price premium over the gold. This is logical as platinum is fifteen times more rare than gold. However, there are occasions when the prices of the two markets are about the same or, in some cases, there have even been times where platinum is priced lower than gold.

Historically, whenever platinum traded at a discount to gold it never lasted. Sometimes it would only last for a matter of days and sometimes it would last for months/years at a time, but the platinum/gold spread ultimately reversed higher and put the premium back on the platinum market.

The Best of the ‘80s and ‘90s

In 1984 and 1985, the price of platinum stayed below the price of gold for more than a year. It ultimately turned around and platinum was at a premium of more than $250/oz. by 1986. After that, traders wised up and for the next two decades platinum would not stay at or below the price of gold for more than a few weeks at a time. Traders pounced on the opportunity whenever the spread would hit ‘even money’ so that, by the time the 1990s rolled around, there were only a few select opportunities to buy platinum at the same price as gold.

Trading In the New Millennium

Thanks to all of the disconnects and market outliers brought about during the financial crisis in ’07 and ’08, the platinum/gold spread finally made its way back to ‘even money’ again by late 2008. Anybody who paid attention and acted on the development could’ve bought a long platinum/short gold spread then and been quickly rewarded within a few weeks. If they had the patience to hold it, the spread went up nearly $600/oz. over the next year and a half. That’s a profit of nearly $60,000 on just one spread!

Platinum Gold spread monthly

Platinum Gold spread monthly

The last go-around was the craziest ride yet. In September of 2011 the platinum/gold spread once again inverted. But traders were in for a nasty surprise this time when it entered a price vacuum and plunged to a new all-time low by the end of the month. The spread continued to forge new historic lows until it finally bottomed at a record low of -$212.30 (on the weekly nearest-futures chart) at the end of the year.

The spread came up for air in the spring of 2012 as it crossed back above the ‘even money’ mark, but it then spiraled to a new record low of -$219.80 (on the weekly nearest-futures chart) in the summer. From there, a bull market was launched. The platinum/gold spread cleared the ‘even money’ mark in early 2013 and ultimately peaked at +$207.10 (on the weekly nearest-futures chart) last summer. From the 2012 summer low to the 2014 summer top, the move represented an increase of nearly $43,000 on a single futures spread (two 50/oz. platinum contracts and one 100 oz. gold contract). Once again, traders who bought the platinum/gold spread when it was inverted were rewarded with profits.

Back In the Hole

The platinum/gold spread has been in a downtrend for several months. Thanks to last week’s market mayhem when the Swiss National Bank broke the Swiss franc/Euro currency peg, gold soared on safe-haven buying and the platinum/gold spread inverted for the first time since the spring of 2013. History suggests that the foundation is being put in place for another buying opportunity.

Platinum Gold spread nearest-futures daily

Platinum Gold spread nearest-futures daily

The $64,000 question is: When should a trader get long? Now that the ‘even money’ level has been breached, the spread could easily decline to the technical support at the March 19, 2013 spike low on the daily nearest-futures chart at -$55.90 of in confluence with the Fibonacci .618 retracement on the weekly nearest-futures chart at -$56.70 (as measured between the August 2012 all-time low to the May 2014 three-year high). If the decline does not end somewhere around this level the selling could even accelerate.

Therefore, buying the platinum/gold spread right now just because it’s once again inverted could be akin to trying to catch a falling anvil. That could be a painful event, both financially and psychologically.   Perhaps it would be prudent to wait for a trend change signal first before we meddle in the metals.

Trend Change Signals

After forming a double top at the similar January and June highs last year, the platinum/gold spread began a multi-month slide. The downtrend is well-defined. Therefore, we are watching two potential setups to identify a possible bullish trend change:

First, the platinum/gold spread has closed below the declining 50-day Moving Average every single day since the month of August began. Therefore, a two-day close back above the 50-day MA could signal that the bear market is ending.

July-June Platinum Gold spread daily

July-June Platinum Gold spread daily

Secondly, the platinum/gold spread has not surpassed a previous month’s high since early June when the 2014 high was established and it has made a lower monthly low for six consecutive months. Therefore, a close above a prior month’s high would alter the price structure and confirm the bullish trend change.

Trade Strategy:

For tracking purposes, the blog will make a hypothetical trade by buying two 50/oz. July platinum futures contracts and simultaneously selling one 100 oz. June gold contract if the spread closes above the declining 50-day MA. Initially, the spread will be liquidated on a two-consecutive day close $5/oz. below the contract low that precedes the entry signal.

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