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Platinum is soaring while gold is struggling and that’s not good for the U.S. stock market.
Yet commentators consider platinum’s PL00, -1.16% surge to a six-year high to be bullish, on the theory that it reflects optimism about the post-pandemic economic recovery, while gold’s GC00, -0.65% decline over the past six months represents the unwinding of trades placed in 2020 to hedge the possibility of a far-worse pandemic.
While there’s some truth to these interpretations, such hopeful news is already reflected in stock prices. What they mean for the future is something else entirely.
Consider a 2019 academic study in the Journal of Financial Economics: It showed that a declining gold-platinum ratio forecasts lower stock market returns over the subsequent 12 months — not higher. Entitled “Gold, Platinum and Expected Stock Returns,” its authors are Darien Huang, a former finance professor at Cornell University, and Mete Kilic, a finance professor at the University of Southern California.
The declining gold-platinum ratio currently paints a sobering picture about the stock market’s prospects over the coming year. As you can see from the chart below, the gold-platinum ratio over the past six months has suffered one of its steepest declines in years.
This ratio fell even more on Feb. 11, when gold fell $16 an ounce and platinum rose slightly. I’ve devoted several columns over the years to this ratio, and it acquitted itself creditably on those prior occasions. The most recent was in April 2020 when I noted that the soaring ratio forecasted “U.S. stocks [being] “substantially higher a year from now.” The S&P 500 SPX, +0.17% since has gained 38%.
Why is the gold-platinum ratio able to forecast the stock market’s subsequent 12-month return? The reason, the professors argue, is that platinum and gold respond to different factors. The former primarily reflects changes in industrial demand, while gold responds both to that demand as well as to investors’ desire to hedge against economic and geopolitical uncertainty.
When the gold-platinum ratio is increasing, therefore, investors believe risk to be rising. That in turn means they will be less willing to invest in stocks until equities can hold out the promise of higher returns. The result is that stocks will fall until their expected subsequent return becomes high enough to compensate for the higher risk.
This is what we saw in February and March of 2020. Investors dumped stocks as the risks posed by the pandemic also rose. After that decline had run its course, stocks’ prospects were very attractive.
Today is the mirror opposite of what prevailed then. As the market has rallied in recent months, equities’ expected future returns have come down. What the gold-platinum ratio does is provide a sensitive barometer of where we stand in this pendulum swing between greed and fear. The ratio’s current message is that the stock market rally has largely run its course.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
Also read: The small-cap stock rally is here to stay. Why these analysts say it’s bad news for the S&P 500
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