What Gold and Platinum Correlations Tells Us About the Market
The automobile industry is one of the largest in Europe and North America. In Germany, auto exports have become so important that they count for more than 20% of the total GDP. The country is known for the quality of the vehicles they manufacture, which include cars like Mercedes, Porsche, and Rolls-Royce. In the United States, the auto industry is also very important but in recent years, many car manufacturers have moved to Mexico, where costs are low.
During the campaign, Donald Trump promised his supporters that he would bring back the vehicle industry. He talked passionately about the rotting plants he had seen in places like Detroit.
In the first year of his presidency, Donald Trump worked to lower taxes for businesses. The markets loved him and pushed the stock markets to their all-time highs. That was the good Donald Trump.
This year, we are seeing the bad Donald Trump. He has started imposing tariffs on America’s largest trading partners like China and the European Union. For the European Union, all this is targeted towards the vehicle industry.
In an interview on Sunday, he said that his goal was to bring back the American vehicle manufacturers to the United States. Already, he is investigating the impacts of vehicle tariffs on national security.
All this means that the price of buying new vehicles in the United States will rise. As a result, the need for platinum is likely to drop. This is also coupled by the fact that more people are moving to electric vehicles like Tesla.
Platinum is also an important indicator of the future performance of the economy. A recent report by two researchers from Cornell University and University of Southern California shows that the relationship between the two precious metals (Gold and Platinum) can help traders predict the performance of the markets.
This is because, as explained above, platinum has an industrial use while gold has minimal industrial applications. Gold is mostly bought for investment or insurance purposes. Traders believe it’s value will surge in case of an apocalypse. In the report, the researchers found that contrary to the popular knowledge, gold tends to fall during recessions, by less than the platinum prices. The chart below shows the relationship between platinum and gold prices. The chart shows that the two tends to move in the same direction. Their spread narrowed November 2016 and March 2017. This was during the early days of the Trump administration.
Therefore, traders can use the relationship between these metals to predict the future movements of the markets. A fall in gold prices is usually a sign that traders are not risk averse while the fall in platinum prices could mean that traders are worried about the future of the economy.
One correlation is not enough. Another correlation that traders need to consider is that of gold and the dollar. In recent months, the dollar has risen while the price of gold has declined. The chart below shows the performance of the dollar index and that of gold futures.
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