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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akak's picture

"Bagholders" bitchez!

Imminent Crucible's picture

Since you brought up bags, I have another tragic story. I just got back from a couple of weeks down in La Paz, BCS. My return flight was from LAP to TIJ, with a walk-through at the Tijuana border crossing. I put my bags on the X-ray conveyor and walked around. As I was taking them off at the other end, the CBP guy at the console said, "Sir, your leather bag--there's something very dense at the bottom."

I started to say, "Yeah, I put Janet Napolitano in there", thought better of it and said "Uh, it's Mexican coins. I collect them." He kinda shrugged and waved me on.

The tragic part was that, on takeoff from San Diego, the cargo door apparently wasn't latched fully shut. It came open and both my bags fell out into the Pacific, off Point Loma. It's killing me--my new "Dive La Paz, BCS" T-shirt was in there.

Sokhmate's picture

You should've sailed instead, dummy.

Imminent Crucible's picture

Well, I like that idea but I don't have a sailboat. And then there's the fact that the nautical charts are pretty vague about the waters between California and Asheville, NC. I've heard there are some mean shoals around northern New Mexico.

akak's picture


And then there's the fact that the nautical charts are pretty vague about the waters between California and Asheville, NC.

You could alway just do what most other Americans do, and sail the river of de Nial --- it is very wide and very deep, and based on all the evidence I have seen it is quite comfortable and easy to navigate.  Although I gather that it is  rather crowded nowadays.

RockyRacoon's picture

I prefer paddling Upper Shit Creek.  Unfortunately, I've forgotten my paddle.

Tall Tom's picture

And what Commercial Airliner did not seal the Luggage Compartment completely? That is a Major FAA Violation. That will have made NEWS Nationwide. I think they may have used that story to cover up a TSA Baggage Theft.


Seriously. Date? Time? Airline Company? Flight Number?


Events like that CRASH AIRPLANES. A Collision between an Airfoil Surface and Luggage can be just as devastatiing as a Shuttle Columbia Foam Strike accident. The Energy of collisions can rip wings off. This is NOT A JOKE.


The FAA needs to know. The NTSB needs to know. Many people can die from mistakes as these.

lolmao500's picture

It was sarcasm. Just like ``i had a tragic boat accidents and all my guns fell at the bottom of the lake``.

Imminent Crucible's picture

I believe Tall Tom is new to these parts. I was just explaining why you won't find any gold, guns or grub around my house if it comes to a zombie apocalypse. All of it is at the bottom of the Pacific, Mission Bay, the Mississippee and Arkansas Rivers due to a Series of Unfortunate Events.

Son of Loki's picture

The 'rabbit in the stroller' formation has always fascinated me. I heard about it right after I read about "The Cat in the Hat" researched extensively by Dr Suess.


Both the rabbit and cat things still befuddle me.

JohnGaltsChild's picture

Hope it's the Energizer Bunny, gold edition.

Tinky's picture

up vote for the use of the grossly underutilized word "befuddle".


ParkAveFlasher's picture

Seriously, that last one looks like bugs bunny dressed as a kabuki samurai.  

YouThePeople's picture

Etch-A-Sketch charts rule!

Stuntgirl's picture

Is this deviant chart porn?

Manthong's picture

I have a quadratic transform that plots out what I refer to as the “infamous streetwalker in a love swing” pattern that comes to the same conclusion.

Stuntgirl's picture

infamous streetwalker sounds about right.

espirit's picture

I think this author is trying to get us to subscribe to his kids etch-a-sketch collection.

JohnGaltsChild's picture

Now, what do you see in this one??

zorba THE GREEK's picture

When the Powers of Darkness control the internet, I guess we 

could go back to CB radios or sky-writing. 

GNWT's picture

party like it's 1999...


with the Silver Liberation Army...


NidStyles's picture

Screw collectivist clap traps.

fomcy's picture

Looks like GOLD is captured by those crooks. JPY is off the charts, can even fit the MT4 screen.. Dullah looks good cause all others are falling as well.. I mean, if all majors get devaluated then USDX can stay at 80 forever. I'm not sure what GOLD doing here at $1650, while those insane idiots print like nuts. Heck Bernank mention that he got "Additional Tools" if Unemployment not improve quick enough :))) What? Participation rate is like 40% even this I think cooked number so real unemployment at least 15%.. 6.5% Unemployment target make this QE to infinity.. What a mess.. Look what is happening to Gold Miners.. WTF???
Complete absurd.. Amazon report $0.21 Per Q and trades at $280/share, Barrick GOLD
Makes 4x that and trades at 1/10 or the Amazon price.. OMG.. Fools are blind.. Everything upside down..

Son of Loki's picture

I'm sticking with Barret and Freeport McMoran and the likes.  They can have FB, Amazon, GRPN, MFGlobal and so on.

eddiebe's picture

Since the discovery process in the markets is pretty much gone unless you're one of the insiders, trying to reduce the whole of the market place to squiggles and graphs seems useless to me no matter how much I would have to pay for it to find out. Thanks for nothing.

xtop23's picture

Yeah. This smacks of reading tea leaves to me. I can drive down to Chinatown and get that done for 8 bucks. 

And probably recieve just as accurate a forecast.

e_goldstein's picture

as well as a happy ending from the place next door.


Smuckers's picture

Those charts look eerily similar to mouth-pen artistic efforts from the late Christopher Reeve.

Jendrzejczyk's picture

Keep 'em above the belt kind sir. We're tryin' to drink here.

Jendrzejczyk's picture

The author has made the common mistake of confusing the "rabbit stroller" pattern with the all too common "flight of the gnat" formation.

Mr. Hudson's picture

I am more familiar with the "ape on a motorcycle scratching his back" formation.

Mr. Hudson's picture

That is some crazy charts. They must be erratic because Obama is going to print food stamps backed by gold.

AgAu_man's picture

Here we see that the demand for and price of Fe, Pb and Cu keeps rising: On!

Shell Game's picture

I love seeing free markets spring up amid the fascism.  We will not be assimilated!

NidStyles's picture

WTF is this garbage? Looks like New-Age style sophistry.

e_goldstein's picture

Technical analysis is now dependant on formations that look like they were scribbled by a 4 year old.


Someone please wake me up post-absurdity. Thanks.



MeelionDollerBogus's picture

Ya, pretty much no ratios should have been used & if possible, 3-D scatterplots SHOULD have been used, potentially several of them. THEN if you can show some polyhedral region with some regular shape or some regular progression that matches a plain-english description, maybe some explanation, great.

None of that here.

Bansters-in-my- feces's picture

Just a quick question to the author of the article.

Are you fucking retarded.?

That would help explain your theory.

Bansters-in-my- feces's picture

I went back and re read the article ,and now I rephrase my last comment.

"YOU are fucking retarded"

Me_Myself_and_I's picture

I tried to absorb the pictures but I was distracted by the lady in the red dress

Pareto's picture

fffffff...........fucking ......what the fuck....."sign up" to explain a bunch of squiggly shit crap......fucking geeezzzzzzzzzuuussssssssss christ!  The only thing more retarded than this attempt at explaining shit, is me actually reading it.  10 minutes of my life i'll never get back..........chart that dynamic complex.....fucker!

joego1's picture

This could only mean buy silver and hide from the guy that came up with these charts.

ali-ali-al-qomfri's picture

“Rabbit sitting in a stroller” that’s  Precious Mental.

Example 1 is the ancient and famous 'Pharoh releasing the bat’ that is a really positive chart, for bats.

Fix It Again Timmy's picture

Ah, if something is worth something and is cheap, BUY IT!  Kinda simple, but it kinda works....

de3de8's picture


Marge N Call's picture

So...if I read this correctly, he is saying we should by AAPL on the dip here, and that Gold is a barbarous relic, and it costs less to dig silver out of the ground with a kitchen spoon that to buy it as a coin? I'm IN!!!


Dre4dwolf's picture

Im sorry, but there is no way any of these charts mean anything.

MeelionDollerBogus's picture

I agree. The ratios as the axes is useless. You need to measure the raw prices, or have a reasonable conversion of currency, or justify use of a ratio for some reason, e.g. a food crop vs the energy cost for the type of energy (oil?) most used WITH that food crop to produce it cheaply (tractors for corn fields, for example), and so on.

Otherwise it's fairly nonsensical.

Still, putting all the effort into that math gets kudos from me. I push & hope that people will use math but so many just flat out refuse to try. This person did try.

dunce's picture

Some charts are useful for displaying data but the ones shown look more like reading tea leaves to make a futures bet. Cup, rabbit, or ink blots, no thanks.