Guest Post: The New Regime For Precious Metals

Tyler Durden's picture

Via The World Complex blog,

Today we look at long term charts of some key commodities and investigate means by which we might gain insight into the dynamics of their price movements. The methods are from a tool-set I have used for studying climate, much of which has been presented previously.

The key problem is interpreting the dynamics of a complex system from empirical observations. These observations are in the form of measurements of some parameter, like temperature, salinity (in ocean climate studies), or price. For our purposes we will consider month-end prices of gold, silver, copper, and rough rice (CBOT contract) from January 1996 to December 2012. The copper chart appears below.

The charts are most commonly studied as a plot of price vs time. There are many articles written on the statistical methods used. Is it a cup with handle? What about that wedge at the end there? Many newsletter authors have made (or have attempted to make) a business of selling their special methods. For a limited time only*, The World Complex offers its techniques for free. At your own risk, of course.

The dynamical evolution of a complex system is described by a succession of states through which the system has evolved. We have no way of perceiving the actual state of a complex system at any given time, but we may create a "reconstructed state" from empirical observations. Ergodic theory tells us that the succession of reconstructed states will be topologically similar to the succession of actual states, so that studying the "reconstructed state space" will enable us make inferences about the dynamics of the complex system under observation.

Reconstructed states can be most easily created from multiple time series (outputs) from the system, if present, by simply presenting a scatter-plot of the corresponding observations from the different time series. They can also be constructed from a single time series, an example of which we will see next time.

Rather than drawing a best-fit line through the states, we connect them by drawing a curve through them in sequence. This curve is described as the trajectory of the system, and can be said to represent the system's evolution through time.

The state is reconstructed in n dimensions by n observations, where n (the embedding dimension) is ideally chosen so that there are no crossings. Usually n > 3, which is a little difficult to display. Consequently, I normally use n = 2, which is less than ideal, but still useful.

Example 1: Gold/copper vs Silver/rough rice (gold and silver as $/oz, Cu in $/lb, rice in $ per hundred-weight)

This is a plot we have looked at before. The trajectory of the system is complex and fine details are difficult to describe, but overall, the system has largely been confined to the yellow ellipse left of centre, with the exception of three periods: 1) the run-up in copper and silver prices starting in 2006; 2) the commodity collapse in late 2008, when gold held up better than the other commodities in this chart; and 3) the excursion of the past 3 years, which either started in March 2010 (orange arrow on the right at the break-out of the ellipse) or in mid 2009 (left orange arrow at the beginning of the trend). Given its size and duration, we give greater significance to the latest excursion.

But what is the nature of the excursion? Did rice collapse? Or silver rise? Silver has been rising since 2002. Then came a rapid advance up until early 2011, which I'm sure we all remember.

Same commodities--different order.

Not too different (although in this one I had rice in cents per hundredweight). Most of the past seventeen years has been spent confined to the portion of state space within the ellipse, with the exception of the three times noted in the first example, and Buffet's purchase of silver in 1998. None of the excursions had lasting power except for the current one, which broke out of the ellipse in early 2010.

Again--did rice collapse? Or did gold suddenly accelerate in 2010?

Recombining the ratios one more time . . .

Here we see the famous "rabbit sitting in a stroller" formation, which means . . . well, you'll have to subscribe to find out.

The main difference between this graph and the others is that there is no recent excursion of any length.

The reason is that the excursion is the separation of the precious metals (which still includes silver) from the industrial metals and agricultural commodities.

Even though gold and silver have been in a bull market for over ten years, the real regime change only happened about three years ago. What happened?


Data sourced from World Gold Council.
Central Banks were net sellers of gold until early 2009. That big spike is misleading, as it corresponds to China's announcement that it had purchased 454 tonnes over the preceding six years (note that China has not reported any gold purchases since that time). At that point the race was on for Central Banks to buy gold.
I believe it is the Central Bank purchases of gold that have created the new regime we observe in the Au/Cu vs Ag/rice state space.

* until the powers of darkness control the internet

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Shell Game's picture

"Here we see the famous "rabbit sitting in a stroller" formation, which means . . . well, you'll have to subscribe to find out."


lol!  IDK, kinda looks like the equally famous 'SCUBA diver scouring river bed' formation...

Manthong's picture

Good argument, but I assert that according to the law of informational infrastructure, multiplications of relevant physical quantities in either the universal scale or the microscopic scale approximately equal a fixed constant; and multiplications of strong interactions approximately equal a fixed constant and that accordingly stipulates to the price of gold going up as the supply of currency increases and supply of gold decreases.


knukles's picture

Charts look like Jack Lew's handwriting...
Is there a Conspiracy here?

Pool Shark's picture



I'm looking closely, and I think I'm seeing a "Linda Green" in there...



Bullionaire's picture



Embarrassed I actually made it that far...



ParkAveFlasher's picture

+1.  That's when you put dynamo and comical together.

Slewburger's picture

In the turbine industry this plot is called a dynamic orbital. Unless you subtract the static runnout it does jack shit to determine natural frequencies, forcing functions, loads etc.

Some dates would be useful, as its analoge would be shaft orientation. Also using the dollar as a measuring unit is a moot point for static runnout, its chasing a moving target.

malikai's picture

Yea, these cats would to better to try to do a bit of dimensional reduction on their terminology in order to make it a bit more digestible to the non-quants they want to sell to.

Furthermore, you can try to "blind them with science", but you're not really doing anybody any favors unless you can provide useful data for the pragmatic trader/investor/observer.

nofluer's picture

its analoge would be shaft orientation.

All I know is that if there's a shaft involved, I'm highly likely to be on the receiving end of it...


DoChenRollingBearing's picture

When you use very complicated and aggregated data, you often find relationships and correlations that are not really there (or more accurately: causal).

While I am not an expert, I look at sales data almost every day: 600 active line items (past year), 400 active customers (past year) over the last 13 years, although it is really the last four or so that really count (older information shows potential gains and losses of pieces we had / do not have).

Mapping pairs of ratios and making any observations other than very obvious ones (so, why do it...?) seems to be NOT the best way to analyze this kind of data, especially threough time.

Harbanger's picture

What isn't complicated or hard to see is that we are in the biggest debt bubble in the history of the world.  Despite unprecedented Govt spending, we have a negative GDP, real unemployment keeps rising and our economy is contracting.  The US dollar has been selling off for 10 yrs, that's all you need to know.  I'm glad they keep smacking down PM's.  It gives us the ability to keep stacking.  Every dollar you have in your pocket is a unit of debt that's about to implode.

BandGap's picture

It's not the data, it's the model. NO FUCKING WAY TO PREDICT THIS SHIT WITH SO MANY VARIABLES. End of story.

Still, some nuggets of info.

Fedaykinx's picture

... like the last chart, which to me is the only relevant one in the article.

oh and @thread: got silver?

tenpanhandle's picture

It is obviously the "Santa (bernanke) in his sleigh pulling a rabbit out of his ass" formation, which indicates anything you want it to, as long as fundamentals are not applied.

Temporalist's picture

Looks like Jack Lew dropped some of that bad acid again.

Canadian Dirtlump's picture

that is him signing his visa slip at the local strip club


kosher acid + colloidal silver + cloud watching = crouching liger hidden golum.

Sudden Debt's picture

They look like those rorschach tests to me :)

what do you see? Naked chicks making out...
and what do you see in this one? Naked chicks making out...


and this one?... A puppy... looking at naked chicks making out...

bobthehorse's picture

I don't worship at gold's feet.

Even with physical possession.


The government can hit you over the head and take it.

NidStyles's picture

Can't take what they don't know about. Some day the myth of the omnipotent and omnipresent government will expire.

nofluer's picture

the myth of the omnipotent and omnipresent government

It's the drones.... the drones can do ANYTHING!!!


AgAu_man's picture

Heck, I can't find the load of precious I lost last year on a lake in Canada, so it's very small odds of a Canuck finding it, and exactly ZERO odds of our Gringo Federales 'taking' it. 

LongSoupLine's picture

Where's the, " Blythe stuffing our fucking assess with a strap on dildo" formation?

None of this horseshit matters when 2-3 fucking players control the entire fucking commodity "market"

Fuck you Bernanke, JPM, HSBC and you oher dark pool paper fuckers.

Canadian Dirtlump's picture

scotia mocatta shoud make the lineup. the guy with a touque on reeking of maple syrup

Beam Me Up Scotty's picture

"lol! IDK, kinda looks like the equally famous 'SCUBA diver scouring river bed' formation..."

Looks like Ben in search of the gold you lost in your boating accident to me....

Tall Tom's picture

Are you certain that it is not the "Two Year Old Scribbling on the Wall with Permanent Marker" formation?


Maybe, just maybe, your Two Year Old may be a Savant with extraordinary Market Insights and is trying to tell you something.

lolmao500's picture

While the Obamabots are realizing they've been screwed...

What Obamacare did for me
I thought it would be great, free health insurance, then I got a job. Boss says 28 hours a week is all they are offering now because over 30 requires insurance. Great, 30% pay cut right off the bat. But it gets better. My 28 hour week gives me about $18,000 a year which is too much for any government insurance. So now by law I haveto buy my own ($5000) or pay a fine. I'm fucked and every year the fine goes up. So what I thought was a sweet deal turned into an ass fucking. Thanks Obama, I wonder how many people like me turn 27 and find out you screwed us?

Fucking stupid partisans hacks never wanted to see the truth in the first place uh... you just wanted to believe your lord Obama...

The Shootist's picture

Fuck you supreme court! Clearly unconstitutional!

tankster's picture

Actually, you can thank the GOP for killing the Public Option.


cynicalskeptic's picture

or your employer for being such a cheap fuck they won't provide any benefits.....   gotta love the 'dog-eat-dog' 'winner take all' capitalism we've got.  The 6 WalMart heirs are worth more than 40% of the US but are too cheap to provide health care for most of their workers - the company deliberately keeps most employees on part-time status forcing them to apply for food stamps and go to ER's on the taxpayer dime if they get sick.

the social contract of providing a living wage and basic benefits has been sacrificed to allow top execiutives to get filthy rich - this being justified by their 'management' skills (e.g. - ability to screw everyone working for them)

calltoaccount's picture

why anyone with a brain would downvote you for that comment is a mystery.

Beam Me Up Scotty's picture

"or your employer for being such a cheap fuck they won't provide any benefits..... gotta love the 'dog-eat-dog' 'winner take all' capitalism we've got."

So you think you should be a shelf stocker or Walmart greeter and make 6 figure salary just because you have done the same job for the last 25 years?  Please.  You want to do the EZ job all your life, with little responsibility, and you want to get paid top $$ for it.  I have little sympathy for you, if you don't want to improve your lot in life by moving into better paying jobs.  But hey, why give up your weekends and holidays right?

You can't work as a shelf stocker your whole life and think you are going to get $500,000 in medical care over your life.  If you don't earn that much money over your entire lifetime, what makes you think you deserve all that "free" care?

If you don't want a dishwashers wage your whole life, then don't be a dishwasher your whole life.  Simple.

Tall Tom's picture

Yeah. It is better that they quit their job and get better benefits and subsidies from the Government for not working. In that way they not only can have their weekends and holidays, they can have everyday off at taxpayer expense. Furthermore they will have their Rent subsidized and their Health Care needs paid for.


Guess who gets to pay for it??? YOU DO. LOL


Would you work as a dishwasher at a dishwasher's wage? No? Then why will you blame them for quitting and getting on the Government dole where the pay and benefits are better, when there is no incentive to work? So what is the purpose of employment when gain is not possible? There IS NO PURPOSE. So they stop and you wonder why?


You wrote, "I have little sympathy for..."


It is people like you that I laugh at, BECAUSE OF ATTITUDES as YOURS, when they take the Tax Man up their Keister.


Simple isn't it?

tankster's picture

So the level of your health care should be determined by the money you make?

Get yourself some cancer and then lets see how you feel about things, douche!

DosZap's picture

Fuck you supreme court! Clearly unconstitutional!

ONE man did it, and it WAS/IS Unconstitutional, becausehe did not RULE on it as written AS submitted!!.

HE reworded it to say TAX, not Penalty.(outside his purview to re-word a submitted document would not agree?).

Tall Tom's picture

Yeah. That jerk Mitt Romney should have never wrote the ObamaCare Legislation in the First Place. One man. It is all Romney's fault.

A Nanny Moose's picture

stupid partisans hacks never wanted to see the truth in the first place uh...

Wanted, or couldn't? Who was responsible for educating them? Would that educator ever teach them that it is evil?

Harbanger's picture

"Who was responsible for educating them?"

That would be the Democrat controlled public education system.  Indoctrinating our children at a cost of 20-30k per student per year.

knukles's picture

Which will shortly turn into 1 part time teacher on the WEB with 700 full time students overseen by 1,000 bureaucrats to make sure the education is "solid" and within legally enshrined boundaries.

Today we have an essay test and remember, no responses in excess of 40 characters, my lovelies.

lolmao500's picture

Who was responsible for educating them?

Themselves. Educate yourself. Don't wait for the shills to tell you what to think. He didn't do his homework, now he's crying. It's his own damn fault.

dbTX's picture

On a long enough time line all unintended consequesces will surface, welcome to the Obama nation.

A Lunatic's picture

Except they're really intended consequences............

The Miser's picture

"We have to pass it to find out what is in it."  Nancy Pelosi 

Just wait until Obama Care fully kicks in and the costs rise significantly.   You have not seen anything yet.  You will make $18,000 a year and pay $17,999 for health care. 

lolmao500's picture

Yeah I've already seen people with health care insurance costs going up this year by 25-100%...

Thing is, the whole thing is so badly written, insurance costs will continue to go up insanely every year otherwise the insurance companies will go bankrupt.

Tall Tom's picture

The only firms able to afford Health Insurance will be large Corporations. This will make it a certainty that Smaller Corporations will be squeezed out from competition. It will shatter Small Business.


You will either own the Corporation or work for the Corporation and buy from the Company Store. What will happen is collapse.

ultimate warrior's picture

I wonder what happens if you don't  get insurance and then refuse to pay the fine. Will the feds actually arrest people for not getting insurance? Is that constitutional? Since it is Federal law does the FBI come around arresting literally millions of Americans who refuse or can't afford health insurance? 

lolmao500's picture

They will do like they do when you don't pay the unconstitutional IRS.

If you own stuff :

Seize your bank account.

Or your things.

If you don't have anything :

All is forgiven.

They'll give your free house, free phone, free everything on the taxpayers dime.