Analyzing Commodity Bounce: The Precious and the Not So Precious

The bounce continues today in commodities. One interesting aspect of this April blowout, and subsequent bounce, is that precious metals have gone from all looking the same to all looking inverse. They tend to move with pretty tight correlation, being seen as inflation hedges. However, when things get frightening, the platinum group metals (PGMs – Platinum, Palladium and Rhodium) tend to get puked out, since they are seen as an inflation hedge but not a viable unit of currency.

The whole “you gotta be long gold innit” hypothesis rests on the view that people believe currencies will be debased and that the next unit of value we will settle on will be gold, as opposed to beanie babies, copper, or anything else. You begin to wonder what’s so precious about PGMs if they fail this test of being the last thing you bid before you take the shotgun, baked beans and smokin’ Camaro and live out the zombie survivalist fantasy of your choice. Notice the fat tail on the correlation between palladium and gold – it doesn’t do what it is meant to do when you most need it to.

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Team Macro Man has never entirely understood why PGMs are considered precious despite their use in jewelry, as they really are pretty industrial – autocatalysts, dental fillings, oil refineries and other very non-sexy stuff make up more than 60% of demand. Rhodium can’t even be traded in ETF or futures format and looks very industrial.

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To make matters worse for people of a macro trading bent, these metals as a trade have gotten pretty crowded recently. Places like Brazil, China and India are actually starting to put vehicle emissions standards in place, which has led to a lot of funds being long a lot PGMs, expecting that those standards + growth = a lot more demand for catalysts and PGMs. How is emerging market growth, an inflation hedge and government policy for an added boost? Throw in this employee of Chase Manhattan, and it would unequivocally be the hottest thing on the street. What could possibly go wrong?