Platinum versus Gold / Considerable Slack

The following is an extract from commentary that was posted at on 14th April 2002.

Platinum versus Gold

Although they are both precious metals the prices of platinum and gold respond in very different ways to different economic and monetary environments.

Below is a long-term chart of the platinum/gold ratio. The chart was taken from, an excellent resource for financial market data. We've added notes and lines to the chart to illustrate (labour?) the point we are about to make.

Platinum tends to out-perform gold during prolonged periods of economic growth or perceived monetary stability and to under-perform gold during prolonged periods when confidence in the economy and the financial system is deteriorating. This relationship occurs due to gold's status, a status that has developed over thousands of years, as the ultimate form of money outside the financial system.

With reference to the above chart we can see that the platinum/gold ratio plunged (the gold price rocketed higher relative to the platinum price) during the early-1970s and bottomed, in late-1974, at around the same time that the stock market was hitting its major low. It is also apparent that the platinum/gold ratio trended higher from 1982 through to 2000, reaching what looks like a bubble peak in late-2000 at around the same time that the stock market bubble began to lose air at a rapid rate.

If the decline in the stock market and real economic growth over the past 18 months represents nothing more significant than an interruption to the 1990s' boom then the platinum/gold ratio will move above its 2000 peak over the coming 2 years. However, if we have just witnessed the end of an era characterised by, amongst other things, growing confidence in government, central banks and the fiat money system, then the year 2000 gave us a multi-decade peak in the platinum/gold ratio.

Our analyses of all the financial markets over the past few years strongly suggest that the level of confidence in government and government-sponsored money made a secular peak in 2000 and is now in a secular downtrend. As such, the downturn in the platinum/gold ratio in late-2000 represents a major trend reversal. 

The above chart shows that trends in the platinum/gold ratio, once set in motion, tend to continue for at least 4 years. In other words, we should expect the gold price to trend higher relative to the platinum price until at least the second half of 2004. This means that although some exposure to platinum (via the stocks of platinum/palladium producers) is desirable we should, based on the evidence at hand, continue to substantially overweight gold relative to platinum in our investment portfolios.

There are certainly going to be extended periods over the next few years - periods when the prospects for economic growth temporarily take a turn for the better - when platinum will out-perform gold. However, the trend in the ratio is now DOWN and we will not be surprised if gold trades higher than platinum at some point over the next 2-3 years.

Considerable Slack

"Inflation declined during the recession and seems poised to decline further as growth accelerates in an economy with considerable slack," he [Dallas Federal Reserve Bank President Robert McTeer] said in the Dallas Fed's annual report.

The above really is an incredible statement from the president of the Dallas Federal Reserve Bank. There was apparently so little slack in the economy during 1999 that the Fed felt compelled to raise short-term interest rates a number of times, yet today, with consumer spending and the overall level of indebtedness having grown considerably over the past 3 years, the economy supposedly has "considerable slack". We wouldn't argue that there is considerable slack in those few sectors of the economy where capacity was expanded at a phenomenal rate during the Fed-sponsored NASDAQ bubble (eg, the telecom industry), but the absence of "slack" that led to an energy crisis during 2000-2001 has certainly not been addressed.

The 'lack of slack' in the US economy is evidenced by the surge in energy prices over the past 5 months despite the continuing strength of the US$ (only the recent gains were Middle East related). It is also evidenced by the behaviour of the bond market.

Below is a chart showing the yield on the 10-year T-Note during the 6-month period following the 1990-1991 recession. At the end of a recession there is typically a lot of 'slack' in the economy and this 'slack' enables long-term interest rates to fall during the initial stages of recovery. This is what happened after the early-90s recession.

Below is a chart showing the yield on the 10-year T-Note over the past 6 months. If there really was "considerable slack" in the economy and inflation really was "poised to decline further" then interest rates would still be trending lower. That is clearly not the case.

When McTeer uses the word inflation he is incorrectly referring to an increase in the CPI. If we define inflation correctly (as an increase in the supply of money) then the current US inflation rate is 9.1%. This inflation will eventually put upward pressure on some prices, although anyone who truly believes that the CPI accurately represents cost of living changes, or is even an honest attempt to accurately represent cost of living changes, deserves a gullibility award. Ironically, if we define our terms correctly then McTeer's statement that inflation is "poised to decline further" is actually true since the money supply growth rate is poised to decline further. 

Regular financial market forecasts and
analyses are provided at our web site:
One-month free trial available.

Copyright 2002