Prices of gold and silver now relive their renaissance. Growing uncertainty in the market due to the ever more probable interest rate increase by the FED and another round of global QE made sure that investors turned to metals. Generally, during those uncertain times and an environment of negative real interest rates (when even interest on deposits or bonds cannot catch up with inflation) precious metals record their great surges.
Since I was recommending buying precious metals during the Intelligent Investor course, the price of gold and silver coins rose by 20% and 45% respectively. What is worrisome is that there has not been any substantive correction. No asset can grow forever and temporary drop of 10-15% would clean up the tense atmosphere.
But today was supposed to be about platinum, not gold. In the past I never recommended purchasing neither I bought platinum myself. You may ask – why now? What changed?
Platinum is very cheap vis-à-vis gold and this is something worth paying attention to.
Prices of gold and platinum are strongly correlated. When gold is going up automatically we see platinum follow. This works both ways but the difference is that platinum is mostly an industrial metal and it peaked 8 years ago during commodity frenzy. Since then it lost more than 50%.
More important than how much platinum costs in USD is its price in relation to the price of gold.
During last 40 years, platinum was 90% of the time more expensive than gold. Below today’s level was only during a brief moment in 1982. Upon a closer look at gold/platinum ratio it occurs that for over 4 decades we revolved around 0.688 – 2.414. Today we are at 0.744 and very close to historical low.
If the past is any indication of what we should expect in the future we have to be prepared for platinum to catch up with gold and overtake it in terms of the tempo of appreciation. Today platinum costs 1075 USD/oz. If we were to return only to a long term average, taking note where the gold price is now, platinum should reach 1600 USD. Higher price of gold would automatically translate into higher prices of platinum.
Opponents of platinum can, of course, accuse this metal’s demand which is driven primarily by automotive industry and as a result, its fundamentals are off. I have to agree. The automotive industry is losing its share of the platinum market and the investment sector is getting a growing foothold. What is more, for a few years now we record a permanent deficit of production (recent strikes in the RSA are worsening the situation). In the case of platinum, we can say that factors of supply and demand are not affecting the price much.
Gain between 2001 and 2008, when the price jumped from 400 USD to 2200 USD, happened not because industry’s demand exploded or suddenly the production crashed. It is all due to investors pushing the price to over 2000 USD/oz.
It is no secret that I am very optimistic about commodities. I have exposure to industrial, agricultural and energy commodities. There are many reasons behind that to name only two: their price is historically low and simultaneously weakening dollar makes sure they have a big margin for climbs.
If I am right the price of platinum pushed by weak USD, rising commodity prices and higher prices of gold should surge in mid-term.
Platinum will never play a role of money. It is precious metal with a big share of its demand coming from industry. The most important factors encouraging your investment in platinum is a strong correlation with gold price and other commodities and low price both in USD and vis-a-vis gold.
It may be that the price of gold is going to go up and platinum will sit still or even drop. Everything is possible. My task is to measure the potential of an asset comparing it to others. In platinum, I see very good investment value.
Another factor for me is diversification. I have a lot of gold, even more of silver and my choice is to increase the variety of my assets.
Would I buy platinum now? It is a strong candidate but on the other hand, RSI at 70 suggests staying vigilant.
The best way of opening your position in platinum is buying ETF secured by physical metal. You can choose ZKB Platinum ETF (ZPLA), ETF Securities Physical Platinum Shares Fund (PPLT) or even iShares Physical Platinum ETC (SPLT). In my opinion, the first one has the best reputation. Also, a good choice is Sprott Physical Platinium & Palladium Trust (SPPP), but as the name suggests it is also backed by palladium.