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.
Source: inflation.us
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.
Source: inflation.us
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.
Summary
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.
Trader21
Vogelmann
"Higher price of gold would automatically translate into higher prices of gold."
I'd suggest changing the last word to 'platinum'.
Great article, from what I see the cheapest bet on platinum is iShares Physical Platinum ETC (SPLT) with expense ratio of 0,40%. Trader21 - are you planning to invest in platinum in the near future?
admin
@Vogelmann,
You are totally right, thank you. About platinum - I will wait a bit and see whether this small correction continues (PPLT) but it is a very strong candidate for me.
Last modified: 2016-07-12 18:32
Cxhirs
With FED preparing to print some I decided to buy some precious metals - which one should I start with: gold or silver? I am ready to spend up to 3,000 USD
Vogelmann
Thanks for your answer; in my portfolio there is 25% share in metals and resources: physical gold, silver, gold miners (GDXJ) and agriculture resources (RJA); I am dangerously skewed towards Polish stocks (65%) and I want to decrease that share and that's why I was asking about your current view on platinum.
I like Marc Faber's idea to invest 25% in stocks, 25% in metals, 25% in bonds/cash and 25% in real estate and I want to implement it. Since I already have 25% in metals/resources I am considering buying some REIT(s). Do you still believe that the best market to invest in real estate is Singapore? If so, which instrument would you choose? They are very numerous with the yield that may be differing significantly. I'd be grateful if you could share some of the best ones that I should focus on (similarly to what you did in the article about platinum).
I see that Brexit can be London's loss and Asia's gain as property funds seek safe havens like Singapore, so it may be a good time to invest in REITs now.. On the other side, rising tensions around South China Sea may be a bad news for the whole region and Singapore with its strategic position on the map may be in the eye of the storm..
admin
@Cxhirs,
You may either buy very cheap (comparing to gold) silver or more stable (less volatile) gold. Buy coins for liquidity. This seems like a very good start for your investment. Good luck!
@Vogelmann,
I wrote an article about REITs here http://independenttrader.org/renting-out-your-property-or-investment-in-reits.html
Check the list of Singaporean REITs I listed there as recommended. First and foremost - check the costs of servicing because even the best offer on paper may give less profit than mediocre opportunity without asterisks and fees in fine-print.
I really like that you are thinking critically. What is happening now in South China is crucial to the future of geopolitical polarity of the world. The US is now acting on borrowed time as the economy is ailing. China makes a move while Russia is still closer to Beijing, not Washington. The US will not make any decisive actions (conflict) before new president is elected and what we see now may be Xi flexing muscles to show strength (military and identity/national strengthening to cover headlines of bad economy - just like Putin did during Ukraine) and to seal the deal with Chinese investment/takeover in Europe with regard to the New Silk Road. Washington focused on the South China Sea is Washington losing its grip in Europe.
On the other side of the globe: London is going to lose as long as there won't be a trade deal between the EU and the UK. New PM has a lot to do and only time will tell.
Arminius
@admin
(off-topic) Regarding UK, is it really that complicated? I'm wondering why the Brits not just rejoin EFTA. All contracts are already written - no real need at all to negiotiate. Price is simply free movement of people - a price they probably had to pay anyway. Isn't it amazing that of all people the Brits are the one trying to prolong an uncertain exit phase characterized by painful investment caution? I'm just asking because nobody talks about EFTA.
admin
@Arminius,
You made some really good points. Negotiations should be simple - copy&paste the deal between Norway/Switzerland and the EU and sign. About the free movement - I don't know if Eurosceptics would agree to this compromise - still, in this parliament, they have no say so again we have the argument to hasten everything. On the side note: Look how many careers Brexit can make or break. The games of political drama already entered into new chapter unfortunately, the price is paid by everyone.
So to put it all in two sentences I will say this: every one of us knows how to make a life of average Mr. Smith easier - lower taxes, scrap regulation. The reason why this is not happening is the lack of political will to do so.
Vogelmann
Thanks for your reply admin; I will study the ones you have listed in that article and will take it as my database within which I need to find the most promising one(s).
Since the geopolitical situation is really dynamic and to large extent unpredictable for non-insiders, the best way is to remain diversified among different asset classes, but there is still a room for outperformance within each of them by choosing the right instruments (i.e. best stocks or REITs in that case). I feel too uninformed to be able to balance my portfolio strategic allocation according to current geopolitical events and I don't want it to be obsessed or having my life dominated by that. I know this may impact my rate of return in a negative way, but who can guarantee that our predictions will be right..