Gold, Platinum, Palladium, Silver And Rhodium: A Relative Value Analysis

Includes: GLD, PALL, PPLT, SLV
by: Warrior Economics


In the context of recent market volatility, a closer look at precious metals is warranted.

Selected precious metals have historical pricing relationships which may be helpful in the context analyzing current valuations.

An analysis of historical price ratios and correlations can show likely investment opportunities, especially when paired with a thorough analysis of current supply and demand fundamentals.

On a relative value basis gold may currently be overpriced while rhodium may be notably cheap. However, additional contemporary supply and demand forces need to be explored further.

Click to enlarge

(Image Source:

Most analysts and investors would agree that equity market volatility has increased since the Federal Reserve decided to raise the federal funds target range to 0.25% - 0.50%. Below we can see that the VIX CBOE Volatility ETF (NYSEARCA:VXX) is up just over 14% since the Federal Reserve raised its target rate. In contrast, the S&P 500 is down more than 7% during the same period through 02/19/16. Concurrently, precious metals have been mostly positive with the exception of palladium which is down slightly over 12%.

Click to enlarge

Although this chart tells an interesting story regarding the recent relationship between precious metals and equity market volatility, it merely serves to frame a contemporary discussion. Most would agree that the time period above is too limited or that the data above is merely anecdotal at best. In this context, I decided to take a fairly unique approach. Rather than review only the current supply and demand forces at play for gold, silver, palladium, platinum and rhodium, I took a deep dive into two relative data points.

First, I used data from to build average historical price ratios for each metal as they relate to one another. I did this for the 10 year, 20 year and 30 year time periods as illustrated below. The solid lines are current spot prices for each metal as of 02/19/16, while the halo dots for each chart are the averages of all implied prices for the metal. The halo dots are derived from historical pricing ratios for all five metals for each period. The individual dots are implied prices based on the historical ratios for each precious metal as it relates to every other precious metal individually. The most important of these data points are the current spot price lines and each hallo dot (average) for the respective data period. More specifically, if the current spot price line is above the hallo dots, it may mean that the metal is overpriced relative to other precious metals. However, if the line is below the hallo dots, the opposite may be true.

Click to enlarge

Based on the data illustrated above, on a relative basis it appears that gold, silver and palladium may be overpriced in relation to other precious metals. In contrast, the analysis shows that platinum may be fairly priced in relation to its peers while rhodium appears to be notably undervalued.

Although this data is interesting, I decided to take a deeper look to see how correlated each of these metals are to one another; this is our second set of data points. Using 5 year performance data from, I was able to build a correlation matrix for each of the metals as shown below.

Click to enlarge

The chart above clearly shows that gold and platinum are the most correlated metals at 0.83 over the last 5 years. Similarly, gold and silver have had a strong correlation at 0.80; silver and platinum have also been correlated to each other but to a lesser degree at 0.74. In contrast, palladium has a much lower correlation to gold, silver and platinum at 0.48, 0.51 and 0.60 respectively. Lastly, rhodium has had a remarkably low correlation to all other precious metals with a 0.19 correlation to gold, a 0.20 correlation to platinum, a 0.11 correlation to palladium and a 0.18 correlation to silver. Rhodium's low correlation to other metals is likely due to its large price swings. This is typically attributed to its rarity in the face of periodic short term supply and demand fundamentals. We will address this at a later in the article. However, it is worth mentioning in the context of its historical volatility in relation to correlation data.

For now we can use the correlation data to take a closer look at gold, silver, platinum and to a lesser degree palladium. The illustrations below are similar to the price ratio analysis that we discussed earlier. However, these charts have been adjusted to include only two of the most correlated metals for gold, platinum, palladium and silver. This will hopefully reduce some of the outlier noise from less correlated precious metals in the context of historical price ratios.

Click to enlarge

So what does this enhanced ratio analysis using correlation data tell us? In the upper left hand chart we can see that gold may still be overvalued when compared to platinum and silver. In contrast, platinum may actually be underpriced base on its historical relationship with its most correlated precious metals. In addition, palladium appears to remain fairly priced when compared to the precious metals it is most correlated to. However, palladium's correlation with both silver and platinum is relatively weak so this additional analysis may have minimal value. Regardless, palladium also appears to be fairly valued in relation to all other precious metals as we found earlier in this article. Last, we can see that silver may be fairly value to slightly over priced compared to both gold and platinum.

It is important to note that gold, as it relates to other precious metals, may play a disproportionate role in this analysis. Gold appears to be overvalued on a relative basis so it may be disproportionately driving up the implied price of the other precious metals. However, this is offset by the implied pricing data from silver, palladium and platinum. It may also be the case that gold is fairly valued based on its own market fundamentals. This is why it may make since to look at the implied prices using all precious metals data, the implied price using only the closely correlated metals and any additional supply and demand force data specific to each metal.

In addition, as previously mentioned, rhodium has a very low correlation to the other precious metals, so additional relative value analysis did not make sense. However, it does appear that rhodium is trading at a fairly low valuation based on its historical price ratio with other precious metals.

In summary, the relative value data analysis in this article illustrated that gold may be trading at a relatively high valuation to its peers while rhodium may be trading at a relatively lower valuation. The data also gave mixed results for both silver and platinum while indicating that palladium may be fairly valued.

Although I believe that this preliminary "top up" analysis gives us a good starting point for researching precious metals, it is only the first step of a thorough analysis. Precious metals can often exhibit notable price volatility and as such they should typically make up a relatively small portion of an investor's portfolio. This is particularly true for rare metals like rhodium but it applies to all precious metals. In this context, it would be prudent to dig deeper into current supply and demand fundamentals in order to gain a more dynamic understanding of the current valuations of each of the precious metals. Consequently, I will be writing a follow up article within the next few days which will cover:

  • common reasons individuals invest in precious metals
  • contemporary supply and demand fundamentals specific to each precious metal
  • various ways to invest in gold (NYSEARCA:GLD), silver (NYSEARCA:SLV), palladium (NYSEARCA:PALL), platinum (NYSEARCA:PPLT), and rhodium.

Click to enlarge

Disclosure: I am/we are long GLD, SLV.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.