Once we broke support a few months ago in the metals market, I began pointing to much lower levels b...
Buy Platinum and Sell Gold
07/29/2011 10:40 am EST
Platinum’s rarity and many industrial uses could bring about solid opportunities, and investors may consider lightening up on gold in favor of select, liquid equities that track platinum.
As gold prices have continued to make a series of new highs this year, platinum prices have languished. The platinum futures are current trading just over $1800, which is below the 2011 high of $1889. In March 2008, platinum made a high of $2308, so it is currently more than 27% below the all-time highs.
Of course, platinum is much more rare than gold, as the annual supply is estimated to be around 130 tons, which is just a fraction of the world’s gold production. It terms of rarity, precious metal experts have concluded that platinum is 16 times more rare than gold.
The majority of the world’s platinum comes from South African or Russian mines. In order to get one troy ounce of platinum, it takes ten tons of ore, which is generally mined in miserable conditions. A small amount of the world’s platinum supply comes from Canada and the US.
Unlike gold, platinum has a number of industrial uses, with 80% going to the automotive industry for catalytic converters, although chemical companies also use a fair amount as well because platinum is resistant to corrosion.
The greater rarity of platinum and its extensive industrial demand are in clear contrast to this year’s lagging price action relative to gold. Historically, this spread will eventually widen out, which will provide some interesting investing opportunities.
Chart Analysis: This long-term chart features platinum prices on the top with the platinum/gold spread on the bottom. This chart goes back to 1995, showing the platinum price low of $332 in October 1998 as well as the 2008 high of $2308.
- Platinum prices have been in a range between $1658 and $1889 all year, and the uptrend, line a, is now at $1672
- The weekly on-balance volume (OBV) (not shown) is acting stronger than prices
- The spread is currently at $179 after hitting a recent low of $165. This spread had a high of $525 at the end of January
- The chart of the spread shows a well-defined downtrend with the 21-week weighted moving average (WMA) of the spread at $240. A move above this level would suggest that the spread had bottomed
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As for individual stocks, there are very few pure platinum plays, as the ore it is mined from also contains nickel and copper. Anglo American plc (AAUKY) is a very large, $53 billion company that in addition to mining platinum, also mines diamonds, coal, base metals, and iron ore. Additionally the company mines, processes, and refines the platinum group metals.
- The weekly chart looks quite similar to that of platinum prices. AAUKY has important chart support, line a, in the $21.60-$22.35 area. The longer-term uptrend, line b, is in the $19.40 area
- The weekly OBV did confirm the recent highs but has now dropped below its weighted moving average. The daily OBV (not shown) is neutral
- Prices seem ready to reverse to the downside this week, as they are below the highs at $24.35. Further resistance is in the $26.30-$27.53 area
There are several platinum ETFs or ETNs, but most have low average volumes, which means a wide bid/ask spread. ETFS Physical Platinum Shares (PPLT) seems to be the most liquid, trading with average daily volume over 60,000. It is designed to reflect the performance of the price of physical platinum, minus expenses.
- PPLT looks ready to close lower this week (chart updated through July 28), which would leave a bearish candle formation. The doji that formed in June (see circle) also led to a sharp decline
- There is initial support at $172 with more important support in the $166 area, line d. A violation of this level would indicate a drop to the 61.8% support at $163
- The weekly OBV is acting stronger than prices, as it made new highs this month. It is also above its rising weighted moving average. Longer-term OBV support is at line e
- The daily OBV (not shown) looks less positive
- Resistance from the previous peaks stands at $183 and $186.60
What It Means: It had been many years since I looked at the spread between platinum and gold, but commodity expert and active spread trader John Person suggested I take a look at the spread, which he found quite interesting. Though he had no formal recommendation for the spread, he did provide this information for those who were looking to trade this spread:
“The margin requirement is quite significant, the spread is $4,132.00. We would have to do a ratio quantity like two platinum to one gold, since gold is $100.00 per dollar move while platinum is $50.00”
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Though the spread is clearly at the lower end of its typical range, my analysis does not yet suggest that it has bottomed out. A pattern of higher highs and higher lows could be formed in the next few months.
Those who have a large, profitable position in gold ETFs like the Spyder Gold Trust (GLD) might consider selling some of their shares and scaling into a platinum ETF like PPLT.
How to Profit: The chart analysis for Anglo American plc (AAUKY) and ETFS Physical Platinum Shares (PPLT) suggests that they are likely to drop back to recent lows, which may provide a good entry point. Look for a test of support levels on AAUKY at $21.60-$22.30 and at $166-$171 for PPLT to signal buying opportunities.
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