Rare Platinum Trade Setting Up Now

11/15/2011 11:08 am EST

Focus: COMMODITIES

With platinum now seriously undervalued compared to precious metals like gold and silver, traders and investors should look to secure some platinum exposure while the commodity bull market keeps running.

Historically, precious metals (such as gold and silver, for example) have had an important role as currency, but are also regarded as investment and industrial commodities. With the ongoing crises in the Western world, precious metals are regaining their role as “currency,” as they cannot be printed out of thin air (unlike fiat money).

The best-known precious metals are the coinage metals gold and silver. While both have industrial uses, they are better known for their uses in art, jewelry, and coinage. Other precious metals include the platinum group metals: ruthenium, rhodium, palladium, osmium, iridium, and platinum, of which platinum is the most widely traded.

The demand for precious metals is driven not only by their practical use, but also by their role as investments and a store of value. Historically, precious metals have commanded much higher prices than common industrial metals.

These days, gold is trading near all-time highs, while platinum is trading about $700 below its all-time high reached in 2008.

See related: A “Once-a-Decade” Platinum Trade

Since 1972, platinum traded at about 1.35 times the price of gold, on average. Right now, platinum is even cheaper than gold, trading at only 0.92 times the price of gold.

As we can see in the chart below, this is a rather “rare” situation. It only happened in the early 80′s and for a short time in 1974. In 1972, 2000, and 2008, it even traded as much as 2.30 times the price of gold (monthly basis).

Based on this ratio over the last 40 years, we can say that platinum is “cheap” relative to gold.

chart
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I also made the calculations for platinum relative to silver.

Over the last 40 years, platinum traded at about 76 times the price of silver (monthly average). Right now, it is trading at only 47.26 times the price of silver, far below the historical average ratio. In 2003, it even traded as high as 150 times the price of silver.

In 1979, however, it traded as little as 20 times the price of silver, but that was rather an “exception,” as silver jumped from $6 per ounce to $48.70 per ounce, as the Hunt Brothers tried to corner the silver market.

Taking out this exception from the chart below, I think it’s fair to say that platinum is also cheap compared to silver:

chart
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A similar thing can be said about platinum relative to palladium.

NEXT: Ways to Profit from "Cheap" Platinum

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Over the last 40 years, the average platinum-to-palladium ratio was 3.17. Right now, it is 2.53. In 2001, however, it was as low as 0.60. (Palladium was trading much higher than platinum because of rumors that the Russian stockpile of palladium was almost depleted.)

Leaving this “exception” of 2001 aside, I think it’s fair to say platinum is cheap relative to palladium based on this ratio of the last 40 years:

chart
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Now let’s have a look at the gold-to-silver ratio. Many argue that the gold-to-silver ratio is headed back to 15, a level not seen since 1979. However, as explained above, this move in silver was rather “exceptional” because the Hunt Brothers tried to corner the market.

When we look at the historical average of the gold-to-silver ratio over the last 40 years, we can see that the ratio now (51.60) is just slightly below the monthly average of the last 40 years (56.42). This means gold is not cheap, nor is it expensive compared to silver.

chart
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When we look at the daily gold-to-silver ratio going back to 1920, we can see that the daily average (52.32) doesn’t differ that much from the monthly average of the last 40 years (56.42). This tells me that 55 is a good estimate of the average gold-to-silver ratio.

In the chart below, we can see that gold was expensive compared to silver when the gold-to-silver ratio was higher than 80, and that silver was expensive compared to gold when the ratio dropped below approximately 30.

In April earlier this year, the ratio dropped towards 30, meaning silver was getting expensive relative to gold, and it has now reversed sharply back towards its 90-year average.

chart
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Based on the charts in this article, we can conclude that:

  1. Platinum appears to be cheap relative to gold
  2. Platinum appears to be cheap relative to silver
  3. Platinum appears to be cheap relative to palladium
  4. Platinum thus appears to be the cheapest precious metal discussed in this article

However, all this doesn’t mean that platinum is cheap outright. I am just saying that when we look at historical averages, platinum looks cheap relative to the other precious metals.

When the precious metals bull market comes to an end, it is very well possible (and even likely) that platinum will drop along with other precious metals.

However, if this precious metals bull market continues over the next couple of years, I think one would do well by diversifying some assets from gold/silver into platinum.

Traders have different options for doing so:

  1. Invest in the physical metal by buying platinum coins/bars
  2. Buying an ETF that tracks the price of platinum, like the ETFS Physical Platinum Shares (PPLT)
  3. Stocks of companies that mine platinum as one of their main products, which include  Anooraq Resources (AMO), AngloPlatinum (AGPPY), and Stillwater Mining (SWC), to name a few

By Willem Weytjens of Profitimes

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