It might not be something that many investors have heard about, but there’s one technical indicator amongst the sea of commodities that has an incredibly strong track record for predicting where the stock market is going to go, better than most traditional metrics by far.
The price ratio between gold and platinum is a slightly obscure but respected indicator, and at the moment it’s showing that the current bull run is here to stay.
For the past few months, worries over a potential downturn in the economy have grown significantly. Back by issues such as the ongoing trade conflicts, weakening industrial data from China and the fact that the fed is continuing to cut interest rates to stimulate the economy are all signs that a decline could be coming.
Considering that this is one of the longest bull runs in the history of America, it would seem like we’re overdue for a recession. However, economic researchers have found that the ratio between gold and platinum has a better track record than even more well-respected metrics in predicting where the markets will go.
According to an academic study by two former finance and economics professors at Cornell University and the University of Southern California, they’ve found that the higher the ratio between gold and platinum is, the better it will be for equities, while a lower ratio would suggest that a decline is on the horizon.
For the past few years, this ratio has been steadily rising and now it’s at its highest level in 10 years. For the past 12 months alone, the ratio has gone up 14 percent, while the SYP 500 Index has risen by 13.2 percent over the same time period, a close correlation that investors keenly noticed ever since the study was first published back in 2016.
As for why the ratio between these two precious metals would be able to predict at all, one of those professors recently commented on this. Professor Darien Huang went on to say that it comes down to why these two metals are used in the first place. Platinum, while a precious metal, sees more industrial demand while gold reflects both some degree of industrial demand but also demand from investors looking for a hedge against economic risks.
As such, when the ratio is high, that means investors are anticipating a rising level of risk. In turn, equities need to perform better than expected to attract investors to compensate for these higher risk levels.
While there’s much more to the professor’s explanation of how exactly the theory works, what he did find was that since 1975, the gold-platinum ratio has had a much better track record than nine other well-known predictive indicators, including the Cyclically-Adjusted P/E/ Ratio (CAPE) developed by Yale Professor and Nobel Laureate Robert Shiller.
Critics have responded by saying that with so much data regarding the markets out there, one’s bound to find a particular indicator that fits previous trends but won’t have the same predictive power going forward.
What makes this particular indicator so interesting is that it’s one of the few that are bullish right now, while most others are bearish. Time will tell whether or not the gold-platinum ratio will be proven wrong in the years to come.
