A year ago, the blog entered an unleveraged position in the platinum/gold spread at the equivalent of -$201.20 (premium gold). Back in April, leverage was applied as an ‘add-on’ investment position was initiated. This position was then exited with a loss two months later, putting us back in the unleveraged position with a big, fat cash cushion.
This year the platinum/gold spread made two new records for the history books.
The first new record set in 2016 was the price low. The nearest-futures platinum/gold spread posted a new all-time low when it closed at -$343.30 (premium gold) on June 27th. That same day, the ratio between the nearest-futures platinum and gold spread matched the thirty-three year low of 0.74:1 that was posted on January 20th.
The second new record set in 2016 was the duration of the price inversion between platinum and gold. The nearest-futures platinum price closed lower than the nearest-futures gold price on January 15, 2015 and it has closed at a discount every day since. This duration of one year and eight months just beat out the prior record inversion streak of one year and seven months that occurred from September 1981 and April 1983.
Staying the Course
Although the “investment” strategy for the platinum/gold spread has been underwater for the last several months, the thesis has not changed. Therefore, it makes sense to keep holding patiently and once again look for a setup to add some leverage after a trend change occurs.
You may have read the book The Big Short by Michael Lewis. Maybe you even caught the movie version. One of the takeaways –at least, from this traders’ perspective- is that you can be right on an idea and still hemorrhage money before your idea is proven correct. Recall that the subprime short sellers in the book/film were losing millions of dollars for a couple of years before the inevitable collapse took place. So you have to develop a strategy on how to stay solvent while waiting for the inevitable turn.
This is the whole reason that the “investment” strategy holds a low or non-leveraged position, adds a little bit of leverage if the trend starts to turn, and then cuts back on the leverage if the trend moves adversely again. We are more concerned with how to keep the position afloat until the payoff, rather than trying to be greedy pigs and make the most money possible. The time to start playing offense is after our defense has done its job of capital preservation and the capital gains finally start to materialize.
For tracking purposes, the blog will liquidate the long October-December platinum/gold spread investment position and simultaneously enter a long investment position in the January-February platinum/gold spread at the market-on-close on Tuesday, September 20th. There are currently no liquidation parameters for this low-leverage position. Factoring in the results of one ‘add-on’ investment position, the bankroll for this spread is currently $101,920.