Platinum/Gold Spread: Revise Purchase Parameters

Platinum/Gold Spread

The summer months are now upon us and the platinum/gold spread has shown no signs of turning around. Since another month has gone by and the spread has not yet tripped the wire for a reentry on the long side, we have room to adjust the entry parameters a bit lower. We also think it would be prudent to start tracking the October spread now instead of the summer spread. That way, we won’t have to worry about doing rollovers just a few weeks after getting filled (if it even happens this month).

The Worsening Situation

Yesterday the October platinum/gold spread closed at a new contract low of -$84.00 (premium gold). The spread has now given back a little more than two-thirds of the entire rally from the 2012 all-time low to the 2014 three-year high. This is the deepest discount that platinum has had to gold since January of 2013.

Platinum Gold spread weekly

Platinum Gold spread weekly

This multi-month bear market was preceded by a double top at the similar January 2014 and June 2014 highs. The decline has been well-defined as the platinum/gold spread has only rallied above a prior month’s high once in the last year. Also, the declining 75-day Moving Average has kept a lid on things as the March rally and the May bounce both petered out when the spread neared the 75-day MA.

So far, this bear market has lasted a year. Platinum has been priced at a discount to gold for four and a half months straight. This current bear market has dropped the platinum/gold spread to its third-lowest price level of any bear market in nearly half a century (only the bear market declines into the 1982 bottom and the 2011 bottom were lower). It would seem that the bears may soon reach the end of line.

However, it may not be the smartest idea to ‘catch a falling knife’ and just try to pick the low here. Markets can often make parabolic moves at the end of their run. Our opinion is that a trader should wait for a change in the pattern that defines the current trend and then take a shot.

Platinum Gold spread nearest-futures daily (75-day MA)

Platinum Gold spread nearest-futures daily (75-day MA)

Currently, we believe that a two-day close above the declining 75-day MA for the first time in ten months or a breakout above a prior month’s high would alter the bearish price structure enough to warrant a long position in the October platinum/gold spread. So that’s how we’ll play it.

Trade Reentry Strategy:

Cancel the current hypothetical order in the July-August platinum/gold spread and replace it with a new order to buy two 50/oz. October platinum futures contracts and simultaneously sell one 100 oz. October gold contract if the spread makes a two-day close above the declining 75-day MA (currently around -$44.90) or a one-day close above the May high of -$36.20 (premium gold), whichever occurs first. If filled, the initial liquidation plan is to exit on a two-consecutive day close $5/oz. below the contract low that precedes the entry.

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