Platinum Vs. Gold: Double Dip Or Buying Opportunity?

Includes: GLD, PGM, SPY
by: Daniel Moser

Gold has proven to be a terrific investment for a number of years. As the market has flipped flopped between inflationary fears and global turmoil/deflationary fear, gold has been a terrific safe haven for investors.

Platinum is another precious metal that shares a substantial amount of safe haven traits similar to gold. Platinum, however, also has some growth properties associated with it because it is an input into certain industrial manufacturing activity - particularly auto manufacturing. This semi-subtle difference can provide investors an excellent tell tale of the health of the global economy by examining the ratio of market prices of platinum vs. gold.

Take a look at the figure below:

Click to enlarge

Platinum has historically traded at a premium to gold. During 2008 the platinum premium vs. gold vanished as the global recession spread dramatically. At the worst of the financial crisis (the fall of 2008), U.S. financial leaders were legitimately fearful for the survival of capital markets as Lehman Brothers collapsed. During that episode platinum traded at a very slight discount to gold. Most people can probably agree that the collapse of Lehman Brothers was the worst single event of this global recession/financial crisis to date in terms of a serious financial meltdown only comparable to that of the Great Depression.

Currently platinum is trading at a bigger discount vs. gold than it was during the Lehman Brothers collapse. The precious metals market is currently positioned in either one of two ways: a dip back into a horrible global recession notably worse than the period in which Lehman Brothers collapsed OR a tremendous buying opportunity for platinum/some degree of global growth exposure. While I hate to ride the fence line on it, I will leave it to you to make up your own mind with the more likely outcome.

The very short lived rally in equities would suggest that Europeans are making some degree of progress ... but the metals market would suggest the worst case is still the most likely outcome. They can't both be right. Either way, the ratio of platinum to gold makes for a crucial tell tale on market expectations that investors will be well served to pay heed to.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.