Platinum/Gold Spread: Exit and Reentry Criteria

That Was Quick

The IMC blog entered a long position in the April the platinum/gold spread at -$176.50 (premium gold) on December 29th. The position was liquidated at -$246.80 on January 12th. This resulted in a loss of -$7,030 per spread, not including commissions.

The long position was initiated when the spread made a two-day close above the declining 75-day Moving Average for the first time in a year and a half. The breakdown to new all-time lows prompted us to get out.

It took less than two weeks for the spread to go from a nearly two-month high to a new all-time low. After that whipsaw, we are going to recalibrate our trend change criteria and use a slower moving average.

Platinum Gold spread (nearest-futures) daily with the 100-day MA

Platinum Gold spread (nearest-futures) daily with the 100-day MA

Instead of a 75-day MA, we will now track the 100-day MA on the platinum/gold spread. The spread got just above the declining 100-day MA on December 31st before it turned around and collapsed. We haven’t seen a two-day close above the 100-day MA since August of 2014. Therefore, we will wait for this to happen before we throw our hat back in the ring.

The Ratio

Although the spread hit new record lows, the ratio has not yet matched its record low. Basis the nearest-futures, the platinum/gold ratio hit 0.77:1 this week. This put it just a stone’s throw from the October 1982 all-time low of 0.69:1. It will be interesting to see if the ratio establishes a double bottom around this area.

Platinum Gold ratio (nearest-futures) weekly

Platinum Gold ratio (nearest-futures) weekly

Growing Old

The price inversion of the platinum/gold spread turns one-year-old tomorrow. If it does not see a radical turnaround before the first half of March is over, this will be the second-longest duration of platinum trading at a discount to gold.

The longest stretch of an inverted spread was nineteen months. To match this record, the platinum/gold spread will have to stay inverted until mid-August. That’s always a possibility. If China does not recover and the US dollar stays at multi-year highs, commodities could remain under pressure. Heck, who’s to say the spread won’t make a new time record?

The one thing we can say is that record extremes -both in terms of price and time- are usually followed by major reversals in the opposite direction. May times, the reversal acts like a pendulum in that it swings from one extreme to the other. So when the bear market in the platinum/gold spread finally gives up the ghost, we may be looking at a bull market that carries it well beyond the historic mean. The trick, of course, is to manage risk while we wait for the inevitable reversal. Play good defense right now. Once the trend finally reverses and the ball is in our court, we can get aggressive.

Reentry Strategy:

Buy two 50/oz. April platinum futures contracts and simultaneously sell one 100 oz. April gold contract if the spread makes a two-day close above the declining 100-day MA or a one-day close above the December 31st bounce high of -$167.60, 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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