Platinum/Gold Spread: Setup To Go Long

Record Extremes

The blog has been sitting with an unleveraged platinum/gold spread since September of 2015.  We’re running this position as an “investment”, ergo, the lack of leverage.

The reason for the investment is because the platinum/gold spread hit a record low, the platinum/gold ratio hit a thirty-three year low, and the time that platinum has been priced below gold is at a record duration.  Our thought is that this is like a stretched rubber band that’s due to snap back violently.

However, rubber bands will sometimes break.  That’s another reason we’re doing this experiment without any leverage!

Trader’s View

Investment experiment aside, the platinum/gold spread looks like it could be good for a speculative trade.

First of all, the spread recently tested last year’s record low and stated to recover.  The bounce faded off at the end of May, but a recovery above the May high could put it on an upward trajectory.

Also, the last two times the spread dropped this low (June 2016 and October 2016) it was soon followed by rallies of $182/oz. and $135/oz.

Now, the spread initially bounced off the early May multi-month low and then fizzled out just a couple of weeks later.  Last week it even closed just a mere five dollars away from the May 4th low.  That’s not how it played out the last two times, so it’s a little suspect.

But that brings me to my next observation…

Over the last year or so, the 50-day Moving Average has done a good job of defining the trend in the platinum/gold spread.  The bounce into mid-May stalled out once the spread encountered the declining 50-day MA and failed to clear it.

Platinum Gold spread (nearest-futures) daily

Platinum Gold spread (nearest-futures) daily

A two-day close above the 50-day Moving Average for the first time since February would turn the trend bullish again.  Having that happen right after a test of the prior lows that launched the last two sizable rallies could stack the deck even further in the buyer’s favor.

As a trader- not an investor, mind you- it seems that going long in the platinum/gold spread on a close above the 50-day MA and liquidating on a close below it would not be a half-bad strategy.

Trade Strategy:

Place a hypothetical contingency order to buy two 50 oz. October platinum futures contracts and simultaneously sell one 100 oz. October gold futures contracts if the nearest-futures spread makes a two-day close above the 50-day Moving Average.  If filled, exit the position on a two-day close below the 50-day Moving Average.

Platinum/Gold Spread: Roll to Halloween Contracts

The Long Road

The blog is holding an unleveraged April platinum/gold spread from the equivalent of -$206.30 (premium gold).  It was originally entered in September of 2015.  Boy, it’s been a looooong year and a half.

Leveraged was briefly added in April 2016, but the ‘add-on’ investment position was liquidated just a couple of months later.  This was because the uptrend failed to materialize.

This unleveraged spread position is experimental as it deviates from our normal trading rules of getting in and then exiting if there is an adverse move.  The idea was that a mean reverting commodity spread at record lows (it hit an all-time low of -$343.30 on June 27th and then nearly matched it on October 21st when it traded to -$337.30) with a confirmation on the ratio (it registered a thirty-three year low of 0.7335:1 on October 21st) would be a temporary event.

Platinum Gold spread (nearest-futures) daily

Platinum Gold spread (nearest-futures) daily

Furthermore, platinum has been priced at a discount to gold for a record two years and two and a half months, which is substantially longer than the prior record inversion streak of one year and seven months (September 1981 and April 1983).  In terms of both price and time, the historic extremes argue that a major reversion is long overdue.

The $64,000 question, of course, is “when will it finally happen?!”

Until we get more clarity on the situation, we remain unleveraged on the position.  But once a breakout above -$200 takes place, we’ll pay closer attention.  When that happens, it will time for a challenge of the 2016 high at -$161.20.  If this hurdle is cleared, the odds are pretty good that this record bear market is finally over.  Until then, we’ll patiently roll the contracts and bide our time.

Investment Strategy:

For tracking purposes, the blog will liquidate the long April platinum/gold spread investment position and simultaneously enter a long investment position in the October platinum/gold spread at the market-on-close on Tuesday, March 28th.  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.

Platinum/Gold Spread: Roll to the April Contracts

The Long Road

In September of 2015, the IMC blog bought an unleveraged platinum/gold spread at the equivalent of -$201.20 (premium gold).

We added leverage in April 2016 when we purchased an ‘add-on’ investment position, but the spread moved adversely and knocked this one out a couple of months later.

So far, this position has not made us any money.  But we will continue to pursue it.

Why?!

First of all, commodity spreads show a strong tendency of mean reversion over time.  The platinum/gold spread is no different.

Secondly, the spread has set new records in terms of both price and time this year.  Since it’s a mean-reverting spread, the new price and time extremes should only increase the probabilities of a severe snapback in the future.

On June 27th, the platinum/gold spread sank to an all-time low of -$343.30 (premium gold).  It then came close to matching it on October 21st when it hit -$337.30 (premium gold).  Interestingly, the platinum/gold ratio touched a thirty-three year low of 0.74:1 on June 27th and then hit a slightly lower low of 0.7335:1 on October 21st.  The ratio hasn’t been down there since October of 1982.

platinum-gold-spread-nearest-futures-weekly

Platinum Gold spread (nearest-futures) weekly

In terms of time, we are only three weeks away from marking the two-year anniversary of platinum trading at a discount to gold.  This broke the previous record inversion streak of one year and seven months that occurred from September 1981 and April 1983.

So even though the platinum/gold spread has not performed for us yet, we will continue to exercise patience and money management so we can stick to the original plan.  It’s nothing more than a waiting game right now.

Investment Strategy:

For tracking purposes, the blog will liquidate the long January-February platinum/gold spread investment position and simultaneously enter a long investment position in the April platinum/gold spread at the market-on-close on Tuesday, December 27th.  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.

Platinum/Gold Spread: Two Records Broken In 2016

Breaking Records

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.

platinum-gold-spread-nearest-futures-weekly

Platinum Gold spread nearest-futures weekly

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.

Investment Strategy:

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.

Platinum/Gold Spread: Current Observations

Taking a Beating

A year and a half ago, the platinum/gold spread inverted. Historically, platinum has never stayed priced below gold.  It’s always been a good buying opportunity.  So the IMC blog jumped at the chance to buy.

As readers know, we’ve been in and out of this spread a few times over the last few years.  It feels like we’ve done nothing but get beat like a proverbial “rented mule” whenever we’ve bought the breakouts in the platinum/gold spread.  Despite the abuse, we are still fully expectant that the platinum will once again trade at a premium of gold.

Platinum Gold spread (nearest-futures) monthly

Platinum Gold spread (nearest-futures) monthly

It is important to remember that commodity spreads are mean-reverting.  History shows that the more extreme a trend gets –both in terms of price and time- the bigger the inevitable reversal.  This current bear market is certainly one of the most extreme that the platinum/gold spread has ever experienced.  Just take a look at the current stats:

-On June27th the nearest-futures platinum/gold spread closed at -$343.30 (premium gold).  This was a new all-time low.

-On June27th the nearest-futures platinum/gold ratio matched the January 20th low of 0.74:1.  This is the lowest that the ratio has been since 1982.

-The spread inversion has now lasted for one year and six months.  If the platinum/gold spread doesn’t rally over $231/oz. in the next four weeks, this duration will tie with the record inversion of one year and seven months that occurred from September 1981 and April 1983.

Moving the Moving Averages

In the spring of 2015, we used a breakout above the declining 50-day Moving Average as a trend change signal to enter long positions in the platinum/gold spread.  That didn’t work out so well.

Then we slowed things down and changed the parameters for our trend change signal to a breakout above the declining 75-day Moving Average.  The spread did not comply with this criterion, either.

After the 75-day MA sucker-punched us at the start of this year, we backed off even more and went with the declining 100-day Moving Average as the new standard.  Three months ago, the platinum/gold spread made a two-day close above the 100-day MA for the first time since the summer of 2014.  For the next few weeks, it looked as though our third moving average parameter was the right pick.  The third time was really the charm!

Well, that idea went to hell in a handbasket.  The spread crashed in the second half of June and knocked out the speculative positions with a loss.

Schools of Thought

Right now, when it comes to the platinum/gold spread, there are two opposing philosophies competing for our loyalty.  This first can be summed up with such clichés as “Staying the course”, “Sticking to our guns”, “Winners never quit”, “Always follow the system”, etc.  This school of thought would have us continue to take buy signals in the spread without pause and without question.

The second philosophy is summed up by phrases like “You got to know when to fold ‘em”, “It’s different this time”, “Doing the same thing over and over and expecting different results is the definition of insanity”, “Know when to pull the plug”, etc.  This school of thought tells us to abandon the idea of buying this spread since it has not yet worked out profitably over the last year and change.

The thing is, I don’t think this has to be a binary Yes or No decision.  My thinking is that we can stay the course by continuing to look for buying opportunities/signals.  After all, the history of mean reversion is on our side.  And it’s not like the ratio hasn’t been this low before and the inversion hasn’t lasted this long.  Even if the ratio and duration of the inversion posts new records, the mean reversion idea argues that a reversal is all the more likely.

At the same time, we can drop the signals that are not giving us the results we want and either adjusts the parameters or even use different trade signals altogether.

This is actually what the blog has been doing all along.  We have slowed the moving average parameters after each signal failure.  I offer the analogy that it’s akin to tuning in the dial to get the exact frequency of a radio station.  If the 50-day MA is giving us “static”, then we use the 75-day MA, if the 75-day MA still doesn’t provide a clear signal, we switch to the 100-day MA, and so forth.

Parameter Recalibration

Since the 100-day Moving Average failed us on the last go around, we are now going to cut the speed of the moving average in half.  This means we are now going to use the widely-followed 200-day Moving Average to tell us what the trend is.

Legendary trader Paul Tudor Jones said, “My metric for everything I look at is the 200-day moving average of closing prices.”

This multi-billionaire made his fortune from trading commodities.  So hopefully looking at one of PTJ’s favorite metrics to determine the trend means that we’re in good company here!

Platinum Gold spread (nearest-futures) daily with 200-day MA

Platinum Gold spread (nearest-futures) daily with 200-day MA

On the nearest-futures daily chart, the platinum/gold spread made a two-month rally into the first half of May.  The rally ended after the spread tapped the 200-day MA and backed off.

Last week the spread finally made a two-day close above the 200-day MA for the first time in exactly twenty-three months.  So maybe…just maybe…this is the real deal?!

We’ve been burned a time or three by chasing the breakouts above various moving averages in the platinum/gold spread.  Not by a breakout above the 200-day MA, though.

However, the spread has already rallied $112/oz. over the last three weeks.  The last time it rallied anything close to this was the $107/oz. rally off the early March low.  And that one took two months to play out.  So it’s feasible that the spread has run a little too far, a little too fast.  It may be vulnerable to a pullback.

Ratio Development

It was mentioned earlier that the nearest-futures platinum/gold ratio matched the January 20th low of 0.74:1 in late June.  Now that it is closing in on 0.83:1, it appears that a double bottom is being established between the January 20th low of 0.74:1 and the June 27th low of 0.74:1.  All it needs now is a close above the May 2nd high of 0.84:1 to confirm it.

Platinum Gold ratio (nearest-futures) daily

Platinum Gold ratio (nearest-futures) daily

As an interesting observation, a double bottom in the ratio to mark the end of the two-year bear market would be the mirror image of the double top in the ratio that marked the start of the bear market.  Furthermore, the double top was established in January and June of 2014, while the current double bottom was established in January and June of 2016.  How cool is that?!

We Can Dream

An ideal scenario would be for the platinum/gold spread to clear price resistance at the early May 5th multi-month high of -$208.50 and then make a pullback near that level and hold.  It may offer an attractive enough reward-to-risk ratio to take a shot at it on the pullback.  If it works out, the position could even be quickly pyramided by adding on a breakout above the high that precedes the pullback.

Now that the important 200-day MA has finally been surpassed…and the three-week run looks extended at the same time…we will vigilantly monitor how the situation unfolds.

Platinum/Gold Spread: New Record Low

Back To the Dugout

The IMC blog entered a hypothetical speculative long position in October-December platinum/gold spread at the equivalent of -$239.40 (premium gold) on April 14th.  The position was liquidated at -$350.50 (premium gold) on June 27th, resulting in a loss of -$11,100.

Yesterday’s close was a new all-time low for the spread, while the ratio matched the January 20th multi-decade low of 0.74:1.  If a double bottom does not form right here, the ratio could soon reach the October 1982 record low of 0.69:1.

Platinum Gold ratio (nearest-futures) weekly

Platinum Gold ratio (nearest-futures) weekly

We are now back in the dugout and watching to see how this recent collapse plays out.  If the whole Brexit shakeup continues to weigh on the markets, the platinum/gold spread will likely suffer.  Once we get some more decisive price patterns, be it a double bottom in the ratio, a recovery in the spread, etc., we will come back up to the plate and take another swing at it.

Platinum/Gold Spread: The Outlier Grows

Deleveraged

Last September the IMC blog entered an unleveraged position in the platinum/gold spread at the equivalent of -$201.20 (premium gold).  Leveraged was used on April 14th when the blog hypothetically bought another July-August platinum/gold spread at -$235.20 (premium gold).

The ‘add-on’ investment position was liquidated at -$291.60 (premium gold) on June 13th, resulting in a loss of -$5,640.

Platinum Gold spread daily (100-day MA)

Platinum Gold spread daily (100-day MA)

Furthermore, a speculative long position was also entered on the same date and at the same price. This speculative position will be liquidated on a two-day close below -$321.50 (premium gold), which could happen as early as today.

Reign of the Bear

The platinum/gold spread cracked the March 3rd record low today and the ratio of 0.75:1 is just shy of the January 20th multi-decade low of 0.74:1.  Failure to bottom right around here could escort the ratio to the October 1982 record low of 0.69:1.

Platinum Gold ratio (nearest-futures) weekly

Platinum Gold ratio (nearest-futures) weekly

Furthermore, the current one year and five-month inversion could soon match the one year and seven-month inversion that occurred from September 1981 and April 1983.

Obviously, the situation in the relationship between platinum and gold is an outlier.  At some point, it will end and a huge reversion to the mean will begin. 

Platinum Gold spread daily (inversion line)

Platinum Gold spread daily (inversion line)

But timing is everything…especially when leveraged futures contracts are involved!  This is why you need to manage your risk and position size correctly.  Once the bull market is in play, it will make sense to go for the gusto and pyramid positions.  Until then, concentrate on defense.  You do that by using stops and keeping low/no leverage.

Investment Strategy:

For tracking purposes, the blog will liquidate the long July-August platinum/gold spread investment position and simultaneously enter a long investment position in the October-December platinum/gold spread at the market-on-close on Friday, June 17th.  There are currently no liquidation parameters for this low-leverage position.  Factoring in the results of the recent ‘add-on’ investment position, the bankroll for this spread is now $101,920.

Speculative Strategy:

On the long July-August platinum/gold spread entered at -$235.20 (premium gold) on April 14th, roll to the October-December platinum/gold spread at the market-on-close on Friday, June 17th if the liquidation parameters are not triggered.  Risk the October-December spread to a two-day close below -$322.00.

 

 

Platinum/Gold Spread: Bullish Trend Change…Finally?!

Trend Reversal Signal

For the first time since the summer of 2014, the platinum/gold spread made a two-day close above the declining 100-day Moving Average.  This triggered another potentially bullish trend change.

On April 14th, the blog hypothetically bought a pair of 50/oz. July platinum futures contracts at $992.90 and simultaneously sold one 100 oz. August gold contract at $1,228.10 for a speculative long position and as an ‘add-on’ to the long investment position.  This put the spread entry price -$235.20 (premium gold).

Platinum Gold spread (nearest-futures) daily

Platinum Gold spread (nearest-futures) daily

The speculative long position will initially be liquidated on a two-day close below -$321.50 (premium gold), which is $5/oz. below the current contract low.

The ‘add-on’ investment position will initially be liquidated on a two-day close below -$284.20 (premium gold), which is the current low of the month.  Initially, we were going to give it a shorter leash of a two-day close back under the 100-day MA, but we’ve decided to give it a little more breathing room.  This is partly because the platinum/gold ratio is holding above the 100-day MA even better than the spread is.  (A hat tip to Alex for pointing that out).  However, we may tighten the exit criteria if the spread fails to gain more ground by the end of the month.

One for the Record Books

We keep pounding the table about the fact that the platinum/gold spread is overdone in terms of both price and time.  We believe that, based on history, this spread will pay handsome dividends on the long side for those who have the bankroll and the patience to pursue the long side.  But so far, this belief has been based on faith and not evidence.

Still

The January 20th multi-decade low of 0.74:1 put the platinum/gold ratio right on the doorstep of the October 1982 record low of 0.69:1…

While the new record low of -$315.50 (premium gold) that occurred in the spread on March 3rd was not confirmed by a new low in the ratio…

And the current inversion has now been stretched to duration of one year and three months, making it the second-longest inversion in history.  The only inversion that lasted longer was the one year and seven-month run between September 1981 and April 1983.

Platinum Gold ratio (nearest-futures) daily

Platinum Gold ratio (nearest-futures) daily

Given the record extremes of this bear market, we expect that the pendulum will inevitably swing into a substantial bull market.  Therefore, we will be watching for setups to add to both the speculative and investment positions once the bull market finally materializes.

Platinum/Gold spread: Let’s Roll!

Where We Stand

The IMC blog is holding an investment position in the April the platinum/gold spread from the equivalent of -$199.90 (premium gold). Initially, it was bankrolled with $113,000.

At the end of December, we doubled up on the position. Just a few days later, we liquidated the ‘add-on’ position with a loss.

This leaves us in the initial spread position, but the loss caused our bankroll to drop to $107,560.

Beat the Clock

The First Notice Day for the April metals contracts is at the end of the month. It’s still a couple of weeks out, but we’re going to go ahead and roll to the summer contracts now.

We are now going to get positioned into the July-August platinum/gold spread. That way, we don’t have to worry about rolling again until we reach the midpoint of the year.

The ‘Add-On’ Parameters

The spread clipped the 100-day MA on December 31st, but it was a one-day wonder that marked the end of a sucker’s rally.

Once the New Year began, the spread wasted no time heading to new multi-year lows and new record lows followed.

The nearest-futures platinum/gold ratio hit a multi-decade low of 0.74:1 on January 20th. This is within close striking distance of the record low of 0.69:1, which was set back in October 1982.

We know this spread –and its ratio- is ridiculously cheap. But Keynes warned us a long time ago that “The market can stay irrational longer than you can stay solvent.” This certainly applies to the relationship between the platinum and gold markets!

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

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

To double up again, we’d like to see the platinum/gold spread make a two-day close above the declining 100-day Moving Average for the first time since the summer of 2014. We’re waiting for the same trigger point to reenter a speculative long position as well.

If we continue to manage risk -meaning that we use proper position-sizing and not getting over-leveraged- the platinum/gold spread will eventually reward our efforts. Keep the faith.

Investment Strategy:

For tracking purposes, the blog will liquidate the long April platinum/gold spread investment position and simultaneously enter a long investment position in the July-August platinum/gold spread at the market-on-close on Tuesday, March 15th. Currently, there are no liquidation parameters for this low-leverage position. It is being bankrolled with $107,560.

Also, double the position size of the investment if the July-August platinum/gold spread makes a two-day close above the declining 100-day MA (currently around -$231.00). If filled, liquidate the ‘add-on’ position if the spread makes a two-day close below the 100-day MA.

Speculative Strategy:

Cancel the orders to buy the April platinum/gold spread and replace it with the following:

Buy two 50/oz. July platinum futures contracts and simultaneously sell one 100 oz. August gold contract if the spread makes a two-day close above the declining 100-day MA (currently around -$231.00). If filled, exit on a two-consecutive day close $5/oz. below the contract low that precedes the entry.

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.