October 2, 2014
As posted on CQG.
Are Silver and Platinum Cheap, or is Gold Expensive?
Strength in the US dollar over the course of the third quarter of 2014 has resulted in lower commodity prices. For many commodities, the quarter that ended yesterday was a perfect storm, a bearish storm. It all started with grains as corn, soybeans, and wheat fell to four-year lows on a near-perfect growing season in the US. However, it is the strong greenback, up over 7.5% for the quarter, which pushed many other commodity prices lower. While a few select commodities moved higher during the July-September period (aluminum, zinc, coffee, cocoa, and cattle) other commodity prices moved to the downside, in some cases sharply. In precious metals, the quarter ended with widening divergences.
The Silver-Gold Ratio
During the third quarter, the price of silver tanked. Silver fell 19.39% through key support at $18.185 over the three-month period and made new four-plus-year lows. Gold fell around 8.3% for the quarter causing the silver-gold ratio to explode higher.
The move from 62:1 in July to 71:1 in this relationship highlights the divergence between action in the silver and gold markets during the third quarter. The long-term median level for the silver-gold ratio is 55:1. Current levels indicate that, on a historical basis, either silver is too cheap or gold is too expensive.
The Platinum-Gold Spread
The quarter that just ended saw platinum prices swoon by 13.5%. The spread between platinum and gold narrowed with platinum falling more than gold during the period.
Although platinum has traded as high as a $1200 premium to gold in 2008 and as low as a $200 discount to the yellow metal in 2012, the median level for the platinum-gold spread over the long haul has been around the $200 premium level. During the quarter that just ended a dramatic move lower in this spread (over 50%) tells us that, on a historical basis, either platinum is too cheap at current levels or gold is too expensive.
These Divergences Could Be Telling Us Something
Intercommodity spreads like these often offer a great guide for real value. When considering the price of one commodity it is useful to analyze that price in light of other substitutable commodities. With respect to investment demand, there is certainly an interchangeable nature between the prices of silver and platinum and the price of gold. The question for the future direction of these metals is: can we glean anything from the moves in these intercommodity spreads over the past quarter?
The Bottom Line
To me, these divergences lead to a logical conclusion. The bullish trend in the dollar is firmly in place. Commodity prices are generally moving to the downside. Gold held up during last quarter relative to the price of other precious metals. These divergences could be screaming at us that silver and platinum are just the first shoes to drop. Gold opened on the first trading day of the year 2000 at $283 an ounce. The yellow metal is still more than 328% higher than it was at the beginning of the new millennium. Commodity prices, the dollar, and other precious metals are flashing that gold might soon challenge support at the December 2013 lows of $1185. Moreover, it may go through that level like a hot knife through butter bringing these historical relationships back into line.
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