iHub Mining Sector Entrance Lobby

[Pro-Life]

Heavy Metals Sending A Warning To Economy, Markets
Submitted by Tyler Durden on 05/20/2016 08:20 -0400

http://www.zerohedge.com/news/2016-05-20/heavy-metals-sending-warning-economy-markets

The prices of industrial metals have dropped to a near-record low level relative to precious metals, a trend that has had larger negative consequences in the past.

It seems that one of the fads among market technicians recently is the utilization of “ratio’ charts. That is, the comparison of one one asset’s performance relative to another. But while these ratios can make for interesting conversation, their practical value is more questionable.

For one, it can be difficult, or impossible, to accurately construct and execute a real-world strategy based on them. Secondly, while the ratio line may have the appearance of a discernible pattern, it may still lack any instructive value if there is no reasonable relationship between the two assets being compared. For example, it may be that the ratio of soybean meal to Netflix stock has the appearance of a bottoming pattern. However, does that provide any thematic instruction at all? And what’s to say that the ratio of 2 completely unrelated assets isn’t totally random – and subject to change course on a dime and without notice?

That said, we do not think that the use of ratios is devoid of value totally. In fact, we have found a lot of value in selective ratios, as long as the assets bear at least some remote relation to each other. Plus, the cool thing is that technical analysis can at times be successfully employed on ratios, typically in the form of support, resistance and trendlines.

Such is the case with today’s Chart Of The Day. The chart is the ratio of industrial metals to precious metals, specifically the S&P GSCI Industrial Metals Index to the S&P GSCI Precious Metals Index. And it is actually a ratio chart that we like, for several reasons.

1) The 2 two price series are from the same asset class and, thus, at least somewhat relatable.

2) While not always the case, each asset contains an implied message regarding the state of the economy or markets at large. The industrial metals are said to be a barometer of economic demand. Meanwhile, precious metals are very often a safe haven during times of turmoil.

3) The implied messages of the 2 assets are for the most part contrary in nature. Often times, the market forces that will prop one of them up will push the other one down. Thus, combining the 2 into a ratio can visually accentuate the message that markets are sending.

4) The bonus is that the ratio is at a very interesting juncture at the moment.