Platinum to Gold Ratio

On 7 February I posted a discussion on a buy platinum/sell gold pairs trade strategy. This was based on a tight supply situation in platinum with entry triggered by a set up in the ratio chart.

So far so good.  The ratio between platinum and gold has risen, with gold dropping considerably further than platinum. Not my most likely scenario at the time of the original posts, I have to admit.  I was thinking more in terms of platinum rallying by more than gold. Still no room for being too proud in this game – take it how you can get it I reckon.

The reason for this follow up post is that the rally in the ratio chart is behaving in text book fashion. If this continues, it might present opportunities to trade in and out of the ratio on the way up so I thought readers following this strategy might be interested in some thoughts.

Original Strategy

In October 2008, the platinum: gold ratio peaked at 2.36. At that time you needed 2.36 ounces of  gold to buy an ounce of platinum. By October 2012, the ratio had collapsed to 0.86. You could pick up and ounce of platinum for less than an ounce of gold.

The situation at the time the set up was triggered in February is shown on the ratio chart below.

Platinum: Gold Ratio - Source: Bloomberg

Platinum: Gold Ratio – Source: Bloomberg

 The strategy outlined involved

  • Buying Platinum and selling the equivalent value of gold on a break of the dashed resistance line at a ratio of around 1.033
  • Placing a stop loss below the triangle support at around 0.92
  • Setting an initial profit objective on half the position at the 50% retracement level around 1.19.

Current Situation

The rally off the low at 0.86 has filled a neat trend channel. So far it’s also in a pretty clear looking 5 wave structure. While we might now be in for a bit of a correction, if things stay on track, we could see a 5th wave peak at around the top of the trend channel.

If this happens around 1.12 it would represent a 38.2% correction of the ratio’s decline from 1.53 to 0.86.  The original profit objective outlined in the 7 Feb post is based on a retracement of this decline.

One common behaviour pattern for corrections is for the first leg to hit the 38.2% retracement level. In Elliot Wave terms, this first leg is itself made up of a 5 swing structure like this one.

 A downward move often follows before the final leg of the correction rallies to around the 50 or 61.8% retracement levels.

Source: Bloomberg

Source: Bloomberg

Strategy

I don’t belong to a school of thought that says all market moves can be interpreted this way (even if they can, it’s too hard for me)

However, when you do see situations unfolding in what looks like a clear pattern, one approach can be to modify your strategy to take advantage of it.

As with all trading, this involves the risk of being wrong. Even obvious looking patterns fail plenty of times. But it’s a matter of having reasonable prospects of reward compared to the risk being taken.

In this situation, traders who have a long platinum: short gold pairs trade might consider taking profit on part or all of their position if the ratio peaks at the trend channel resistance. The risk would be then to stay out of the market looking to get back in to the trade on a dip with a final objective of a rally to the 50% retracement level around a 1.19 ratio or 61.8% around 1.28.

About Ric Spooner

Over 30 years market experience - professional trader, broker, director
This entry was posted in Commodity, Gold, Market, Trading and tagged , , , , , , , , . Bookmark the permalink.

1 Response to Platinum to Gold Ratio

  1. Graham Turville says:

    agreed Rick – might be also relevant to Palladium

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