Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Thursday, August 30, 2012

Waiting on the A-hole in J-hole

The idea for this title comes from here.

Looking for some action in the state space diagram for the gold-silver ratio.

We have been drawing the hook at the bottom of the graph for the past several months.

To look at how recent actions by the Fed might have influenced the gold-silver ratio, let's look at only the past few years of data.

Here we are looking at the evolution of the system over the past four years or so, from the trough in silver in late 2008. Remember that the vertical axis is lagged by a year, so, change in the vertical direction is a reflection of things that happened a year previously.

On this graph QE1 occurred right around the time when the gold-silver ratio stopped rising and began to decline. So it may have reversed the decline of silver. The spike in silver price (collapse in gold/silver ratio) at the far left of the graph occurred during QE2. So arguably, both QE1 and QE2 were relatively favourable for silver.

Operation Twist has had basically no effect on the gold-silver ratio (the vertical motion is a reflection of last year's fireworks). To see an effect by QE3 we would look for a large deflection to the left or right in the trajectory of our state space.

I can also attest a similar effect in diamond prices. Both QE1 and QE2 corresponded to significant increases in diamond prices. We have not had the same effect from Operation Twist (harder to graph as the specific diamond index data is no longer freely available).

We await the announcement coming tomorrow from Jackson's Hole. It is unclear whether there will be any substantial QE--what they have been doing through Operation Twist seems to have gotten the CBs what they want--some higher asset prices, but not commodities. For this reason, I wouldn't expect any announcement but either more of the same, or some kind of jawboning.

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