Gold and Platinum

The Platinum price has recently been at its lowest level compared to Gold in over 16 years. This looks like an opportunity for pairs traders prepared to “stalk” this trade and keep an eye on the relationship between these metals.

Background

As the chart below shows there have been 3 broad trends in the price relationship between Platinum and Gold since the GFC.

  • During 2008 Platinum prices collapsed. While Gold fell heavily, Platinum fell further and finished the year broadly in line with the Gold price
  • From 2009 until mid 2011, Gold and Platinum both trended broadly higher with Platinum maintaining some premium to the Gold price
  • In the 2nd half of last year, Platinum significantly underperformed Gold, suffering a much deeper downward correction

Spot Platinum and Spot Gold – Daily. Source: Bloomberg

There are a couple of major influences on the relationship between these 2 precious metals

  • As a scarce metal, current mining production has a much greater impact on the demand supply balance for Platinum than it does for Gold where annual mine production is only a small proportion of total stocks. ageing mines in South Africa which are subject to considerable political risk are a major supply source for Platinum. This came into play in recent months when strikes disrupted mine production. As a consequence Johnson Matthey now forecast a supply deficit of 400,000 ounces in 2012.
  • The demand profile of Platinum centres much more on industrial uses and much less on investment than Gold. This is highlighted by the table  below. Platinum’s main industrial uses are in auto exhaust systems, electronic switching and glass manufacture.

These differences mean that Platinum is more sensitive to the industrial cycle than Gold, falling more heavily when industrial production declines as it did in 2008 and 2011 but rising more when things recover.

Long term factors also come into play. A move toward technology which replaces Platinum in vehicle exhausts is a background factor to bear in mind.  

Strategy

Today an ounce of Platinum buys around .91 ounces of Gold. This is not far from the low of .86 in August. The recent mine strikes have seen the ratio climb off this low but not enough to break out of the triangle formation shown on the chart.

If markets start to get more optimistic about industrial production e.g. because there is a really good outcome on the fiscal cliff negotiations then this spread may begin to rise with Platinum outperforming. It may be a long while before we return to a situation where an ounce of platinum buys 2.3 ounces of Gold as it did in May 2008. Even so a decent retracement of the decline since then creates plenty of scope for a buy Platinum; sell Gold trade

Platinum: Gold ratio – Weekly. Source: Bloomberg

Technical analysis can help with timing for trade ideas like this. Simply entering the trade now could work out well in the long run but in the meantime there is a risk that the ratio just drifts sideways for some time or gets worse before it gets better.

Recent price movement has created a triangle formation. A break through triangle resistance would be a bullish warning but runs straight into the resistance of the 2008 low. This is shown by the dashed white line and is at about .998. A break above that gets us into clear air.

Strategy Approach

Provided the ratio does not break below the current triangle support an approach to this pairs strategy would be

  • Buy Platinum and sell the equivalent value of Gold if the ratio breaks above 1.005
  • Use an initial stop loss level behind the triangle support and exit the positions if the ratio falls below .86 

About Ric Spooner

Over 30 years market experience - professional trader, broker, director
This entry was posted in Gold, Market, Trading and tagged , , , , , , , . Bookmark the permalink.

3 Responses to Gold and Platinum

  1. Jaafar says:

    Hi Ric

    Just wondering how this strategy (apparently bearish for gold) fits in with the bullish outlook for gold posted on 7 November. Could it mean that gold may still rise but platinum will rise much faster

    • Ric Spooner says:

      Hi Jaafar,
      Yes that’s how I see it. A scenario in which industrial (and also probably jewellery demand) increases would still be bullish for gold. As you say if the strategy works it’s likely to be a bullish situation where platinum rises faster than gold.

      Of course the other profit possibilities for pairs trades are
      – where the short leg falls more than the long one in an overall bear market or
      – sometimes (happy days) where the one you are long goes up and the one your are short goes down

      These alternatives seem less likely to me with precious metals but it’s possible e.g if industrial demand increases but investment demand was weaker and the US Dollar stronger. That could be a scenario for falling precious metals with gold falling further than platinum.

      Ric

  2. Ric Spooner says:

    Ole Arntzen from our Oslo office sent me some interesting information on the performance of the platinum: gold spread during the 4th quarter of the year. Here are his comments:

    Hi Ric.

    Nice note on Platinum and Gold today

    I just wanted to add a comment for you.

    According to London Fixing, 64% of Q4 (this quarter) since 1990 – favours a fall in the ratio. In other words, only 36% sees a rise for the period. When it comes to December, there is a 50/50 chance of the ratio falling or rising.

    Here comes the interesting piece: 18 out of the last 22 years sees the high or the low ratio for the Q4 within December. History favours the latter part of the month as a low.

    FYI.

Comments are closed.