A Truly Physical Perspective On Precious Metals

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 |  Includes: GLD, JJC, PPLT, SLV
by: Krassen Ratchev

Too many people miss the silver lining because they're expecting gold

- Maurice Setters

Many people will agree that silver is a beautiful precious metal. After just a little polishing, jewelry and crockery made from sterling silver can look just as good today as it did over a century ago. In fact, there are very few materials like silver that can lay claim to possessing versatility of use, durability, fungibility, store of value, liquidity and aesthetics all at once. In my opinion, the only materials that tick all of these boxes simultaneously are the precious metals gold, silver, platinum and copper.

Like a long-lost silver vase you might chance upon in the attic, many investors have re-discovered the fact that precious metals are and have always been a safe haven - an investment that literally stands the test of time. This is due to the simple fact that owning or investing in physical precious metals has absolutely no counterparty risk. Essentially, what you see is exactly what you possess. The increasing attention that the financial media have given to precious metals over the past couple of years has resulted in a kaleidoscope of different opinions, predictions and worrisome stories of market manipulation.

Having said that, in this article I would like to take a step back from the financial mayhem and take a fresh look at the physical stuff. Literally. I am hoping that for both old and new investors my analysis will yield a new perspective on precious metals.

Physical Property

Gold

Silver

Platinum

Copper

Density (g/cm3)

19.30

10.49

21.45

8.94

Electrical Conductivity (S/m)

4.1x107

6.30x107

9.43x106

5.96x107

Reactivity Series (no units)

#2

#3

#1

#5

Thermal Conductivity (W.m-1.K-1)

318

429

71.6

401

Young's Modulus (GPa)

79

83

168

110-128

Hardness (Mohs scale)

2.5

2.5

4.25

3.0

Click to enlarge

Table 1 - Physical properties (in SI units) of Gold, Silver, Platinum and Copper

If you didn't graduate with honors in chemistry you needn't worry - I have described each of the physical properties below:

  • Density - Platinum has the highest density of the four metals. This means that you can fit more mass of platinum in the same amount of volume than gold, silver or copper.
  • Electrical Conductivity - Out of the four metals, silver possesses the greatest ability to conduct an electric current through its structure.
  • Reactivity Series - This is a simple ranking of a metal's reactivity in nature. Platinum is the least reactive, followed by gold, silver, mercury and copper. This is why gold artifacts that have been buried for thousands of years have little to no tarnish on them. And this is also why that long-lost silver vase of yours will need some polishing before it looks presentable for the mantelpiece.
  • Thermal Conductivity - Silver has the greatest ability to transfer heat through its structure than any of the other metals.
  • Young's Modulus - Gold has the greatest ability to be hammered and stretched into long and flat shapes before losing its structural integrity.
  • Hardness - Platinum is the hardest of the four precious metals. This means that you will have more success in scratching a bar of gold with a platinum coin than the other way around.

It is now not very difficult to imagine how the physical properties of these metals have influenced their evolution over the centuries from jewelry to money to a presently ever-growing list of industrial and scientific applications. But how do they stack up on a price-to-physical-property value scale?

In Table 2 below I have presented the current prices (USD/oz) of these metals and the corresponding ratios of prices-per-unit-of-physical-property from Table 1.


Gold

Silver

Platinum

Copper

30/04/2012 Price (USD/oz)

1660

30.8

1570

0.26

RATIO

PRICE DIVIDED BY PHYSICAL PROPERTY IN FIGURE 1

Density

86

3

73

0.03

Electrical Conductivity

4.0E-05

4.9E-07

1.7E-04

4.4E-09

Thermal Conductivity

5.2

0.07

21.9

0.001

Young's Modulus

21.0

0.4

9.3

0.002

Hardness

664

12

369

0.09

Click to enlarge

Table 2 - Ratio of the metal price on 30/04/2012 to physical properties

As can be clearly seen from Table 2, if you want to get decent bang for your electrical buck - or any other buck for that matter - copper stands out as being the best value-for-money. Of course, everyone already knows this.

So, what useful information can investors actually obtain from the above figures in Tables 1 and 2?

This is a question to which each investor will have a different answer depending on their level of market knowledge. My intent was for the above figures to simply provide investors with a new perspective on precious metals and to supplement their existing market knowledge.

For example, despite silver's better electrical and thermal conductivity and similar Young's Modulus to gold, its price ratio in these three physical properties makes it appear to be extremely cheaper than gold. As such, one may conclude that currently silver is a much better investment than gold. What about platinum and its unusually low price relative to gold today? Historically platinum has traded at a premium to gold. While today you will get a better bang for your buck if you use gold for electrical and thermal conductivity applications rather than platinum, copper trumps both of these metals in that regard. So the price difference between gold and platinum must be coming from a different use of the metals. Let's turn our attention to their store-of-value potentials. Clearly a coin or bar made from platinum will be a better store of value - at current prices - than gold. Why? Simply because platinum is harder (won't scratch), less reactive (won't tarnish) and occupies a smaller volume (easier to store) than gold. Clearly the market seems to think that these physical properties are deficient to something else. Perhaps it comes down to the possibility that central banks simply can't get enough platinum bullion (due to its rarity in the earth) to make it worth their while to replace their gold bullion. Or perhaps it comes down to the fact that platinum has been unable to (in its short existence) shake off gold as the true form of money.

Whatever the case may be for you, I believe that an analysis of precious metals from a physical property perspective not only raises interesting questions but may also yield some valuable insights.

(Note 1): Gold, platinum, silver and copper do not represent the complete list of precious metals. I decided to focus on these four precious metals because they are well-known and possess all six of the features mentioned: versatility of use, durability, fungibility, store of value, liquidity and aesthetics. And yes, I agree that it is debatable whether or not copper is a "precious" metal.

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