There are certain dogmas held sacrosanct by precious
metals investors and one of them is that platinum is supposed to be more
expensive than gold. That’s just the way it is. Quite a few eyebrows
lifted and jaws dropped last fall when the yellow metals price overtook that
of platinum. The historic switch took place on Sept. 2nd when Comex gold futures settled at $1,875.25 per troy ounce,
just above platinum’s closing price of $1,873 per ounce. When you
consider the price history of the two precious metals—platinum has
traded at a $200 to $400 premium to gold—the reversal was astounding.
Just to give you a better idea, before the 2008 Lehman Brothers crash,
platinum was trading at more than $2,270 per ounce while gold was trading
under $990 an ounce.
Platinum is much more rare in nature than gold. More
than ten times more gold is mined each year than platinum. Unlike gold, which
is either held in bank vaults or used in jewelry, more than 50% of the yearly
production of platinum is consumed (used up) by industrial uses, mostly in
the automobile industry. Some 40% is used for jewelry manufacturing and 10%
for investment purposes. The Japanese seem to be very fond of platinum as they
account for 95% of the platinum jewelry demand. There are reports in the
press of a nascent interest in platinum jewelry in India, expected to make up
25%-30% of the total Indian jewelry sales in 2012.
The annual supply of platinum is only about 130 tons,
equivalent to only 6% (by weight) of the total annual gold mine production.
It is less than one percent of silver's yearly output. Unlike gold, there are
no large inventories of above-ground platinum. Therefore, any breakdown in
the two major supply sources, South Africa and Russia, would catapult the
price of platinum. An even more intriguing fact is that more than 90% of the
world's platinum production comes from only four mines: three in South Africa
and one in Siberia.
During economic expansion, platinum prices tend to
outpace gold given its dual role as both a precious and industrial metal. But
when the economy slows down, platinum can often stumble. For example,
platinum dropped below the price of gold back in the early 1980s, pushing the
spread below 1.0 for the better part of 5 years as the economy slowly
recovered. During the 2008
financial collapse, platinum prices fell from $2,252 to $774, a drop of
nearly 65%. Both metals crashed. Gold nosedived due to hedge funds
liquidations and investors dumped platinum bracing for a recession expected
to flatten automobile sales. The metals reached parity in December 2008 as
the price of platinum sunk amid the global financial crisis and a collapse in
auto demand. Gold has since has put on a show stopping comeback reaching a
high of $1,900 last summer, but platinum has yet to bounce back. As this goes to publishing, the price
of gold is $1,655 and the price of platinum is $1,515.
Let’s take a look at the chart featuring
platinum. You will see platinum at the bottom of the chart below and the
platinum-gold ratio in its main (charts courtesy by http://stockcharts.com.)
On the above platinum to gold ratio chart, we see an
anomaly unlike anything seen in recent years. There have been several small
breakdowns below the level of previous lows but none have held.
Platinum’s extreme undervaluation is not
something is likely to persist for much longer. The ratio is now at 0.92 and
once it begins to move higher, much more platinum buyers are likely to enter
the market. Platinum’s price below the one of gold is something that
investors view as a buying opportunity (as seen on the above chart) so the
only factor that remains in place – preventing prices from moving
higher – is fear. Once it subsides as investors see that platinum is
not breaking lower, they will buy. This action will likely result in platinum
to soon be outperforming gold, something which has not been seen for some
time (except earlier this year).
Summing up, it
appears that the situation in the platinum to gold ratio and for platinum
itself is favorable and if you’ve been planning to diversify your
holdings, it might be a good idea to consider this particular metal.
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