Platinum/Gold Spread: Roll To April Contracts

This Is How We Roll

The IMC blog entered a long investment position in the January 2016-December 2015 platinum/gold spread at a price of -$200.00 (premium gold) on September 23rd. This position is backed with a bankroll of $113k. Therefore, a sell stop is not currently being used.

We’re going to add to this investment position when the spread finally makes a two-day close above the declining 75-day MA. In addition, speculative positions will also be entered when the spread makes a two-day close above the declining 75-day MA or clears the September price peak. The close above the moving average would trigger a bullish trend change and the breakout above the prior month’s high would alter the bearish price structure and confirm the trend change.

Due to next week’s First Notice Day for the December gold contract, we are going to go ahead and roll the entire spread to the April contracts. We’ll also change our entry and ‘add-on’ orders for the April platinum/gold spread as well.

Scraping the Bottom of the Barrel

After poking just above the 75-day MA at the start of the month, the platinum/gold spread gave up the ghost and plunged. By just a smidgen, the October low was breached. This puts the spread at a new record low. As a confirmation, the ratio also posted a new twenty-three year low.

The platinum/gold spread has now been inverted for ten consecutive months, making it the third-longest inversion in four and a half decades. Like a drunk uncle at the Thanksgiving table, it could be wearing out its welcome here.

Platinum Gold spread (nearest-futures) daily

platinum Gold spread (nearest-futures) daily

With the spread at the lowest price in history, the ratio at the second-lowest price in history, and the duration at the third-longest stretch in history, we think the best play is going to be on the long side. Since spreads often act like a pendulum, the current extremes could be setting the stage for a sizable move to the upside when the bear market finally ends.

Furthermore, the seasonal patterns indicate that the platinum/gold spread usually strengthens between now and the end of January. Therefore, we will stay the course with our long strategy.

Trade Strategy:

Cancel the order for the January 2016-December 2015 platinum/gold spread and place a new hypothetical order to buy two 50/oz. April platinum contracts and simultaneously sell one 100 oz. April gold contract if the April spread makes a two-day close above the declining 75-day MA (currently around -$167.00) or a one-day close above the November 6th high of -$149.10, 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.

Investment Strategy:

On the long January 2016-December 2015 platinum/gold spread entered at -$200.00, sell the spread and simultaneously buy the April spread at the market-on-close on Wednesday, November 25th. Currently, there are no liquidation parameters for this low-leverage position.  

Double the position size of the investment if the April platinum/gold spread makes a two-day close above the declining 75-day MA. If filled, liquidate the ‘add-on’ position if the spread makes a on a two-day close below the declining 75-day MA.

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