Gold-Platinum Ratio Signals Headwinds for Stocks Over Next Year

The gold-platinum ratio, an obscure indicator with one of the best historical records for forecasting the stock market, says equities will face stiff headwinds over the next 12 months.

That is the conclusion of Mark Hulbert, the MarketWatch columnist whose Hulbert Ratings audits investment newsletters. He points to a peer-reviewed study published in a top finance journal, entitled "Gold, platinum and expected stock returns." According to the study's authors, the ratio "outperforms nearly all existing return predictors" when forecasting the market's direction over the subsequent 12 months.

The indicator's message is plain. The ratio today sits essentially where it stood 12 months ago, after falling by nearly half in the year before Hulbert first wrote about it. That elevated level, on the study's logic, still signals trouble ahead.

How does the ratio work?

The mechanism rests on what each metal represents. Platinum derives most of its value from industrial uses, which makes it a proxy for economic activity. Gold proxies for that same activity but also for geopolitical uncertainty. A higher gold-platinum ratio therefore means geopolitical risk is elevated, and the stock market's expected future return must rise as compensation for the added uncertainty investors bear.

This argument carries a specific implication for timing. When the ratio is rising, the stock market performs less well than it otherwise would. The ratio is inversely correlated with simultaneous changes in the market and positively correlated with subsequent changes.

Hulbert offered one concrete comparison: think of platinum as a factory-floor metal and gold as a crisis-hedge metal, and the ratio as the spread between fear and production.

Was last year's bearish signal wrong?

Yes, and Hulbert does not hide it. When he wrote about the indicator nearly a year ago, the ratio had fallen by nearly half over the prior 12 months and painted a bearish picture. Some readers questioned that reading, suggesting the drop might have reflected unrelated factors such as supply disruptions.

A year later, that explanation looks weaker. The past 12 months should have been long enough for any short-term pricing idiosyncrasies to resolve, and the ratio's level is essentially unchanged from a year ago. Still, Hulbert concedes: "there's no denying that the ratio's year-ago bearishness was wrong. The weight you put on the indicator therefore depends on whether you believe that the ratio has stopped working."

Has the indicator held up out of sample?

It has, and Hulbert calls that point crucial. No one can know in advance whether an indicator has only temporarily stopped working, but the ratio has been largely accurate since the study was published. That means it has worked out of sample, which Hulbert describes as a statistical gold standard.

The chart record backs the claim. The ratio turned upward soon after the COVID bear market and kept climbing for several years, correctly anticipating the strong bull market that followed.

What should investors take from it?

The gold-platinum ratio, in Hulbert's words, "appears to be yet another shot across the bow of the bull market." Investors who weight out-of-sample evidence heavily will treat the signal seriously. Those who believe the ratio stopped working after last year's miss will discount it, and the next 12 months of market data will settle the dispute.