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Thomas Streater
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I specialize in the Energy and Materials sectors because I have commercial experience within these areas. I do not have a long or short bias, I just try to find mispricing.
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  • Platinum Vs. Gold 2 comments
    Aug 7, 2012 11:01 AM | about stocks: GLD, PPLT

    Platinum vs. Gold

    (click to enlarge)

    Platinum divided by Gold over the last 25 years. Platinum has nearly always traded at a premium to gold until now. Platinum is 30 times rarer than gold, it should trade at a premium to gold, all else being equal.

    (click to enlarge)

    More recently, this spread has taken another leg down.

    Why could this be? All else is currently not equal.

    Platinum is a metal used in both jewelry and industrial application. Negative sentiment in China and Japan, two of platinum's biggest markets is not helping demand in either area.

    Lower and lower interest rates is making gold more attractive as an "anti-fiat-currency". Additionally, gold's financial instruments are more liquid, so it is more susceptible to bubble characteristics.

    Back to normal?

    I believe sentiment in China will improve after the government change-over later this year. This will lead to both improved elite consumer spending and improved industrial production. This will help drive platinum demand again.

    Additionally, with nearly 80% of platinum's production concentrated in South Africa, there is always risk of supply disruption caused by electricity failure or governmental mining interference. Gold's supply is more evenly distributed and therefore more steady.

    The platinum/gold spread could also be boosted by further financial institution turmoil. In this scenario, many banks and asset managers will be forced to sell their investment holdings in gold to raise dollars, platinum would be relatively unaffected in this technical gold sell off.

    The main risk is runaway gold prices on further "currency war" worries, and gold's liquidity / ease of investability could help spur bubble and more extreme lower levels in the platinum/gold spread.

    However, my base assumption is that this time next year, platinum will return to trade higher than gold, more in line with historical trends reflecting fundamental scarcity.

    With my own worries about USD and commodity supply cost curves in general, I am bullish both outright platinum and gold prices, but for the above reasons, more so platinum. As a Relative Value trade however, buy platinum, sell gold.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PPLT over the next 72 hours.

    Themes: Gold and precious metals Stocks: GLD, PPLT
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Comments (2)
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  • I think that gold still has another potential 5 to 10% of upside vs. platinum. Gold is money and central banks buy it for their FX reserves. Platinum is an industrial metal and one of the biggest uses is European car manufacturing (and I am not bullish on that). So, we are talking monetary vs. industrial metal. I don't know but I think that platinum would look a lot more attractive at 1200 .... not sure if it could get there. I actually doubt it given that good chances of a new QE.
    7 Aug 2012, 04:50 PM Reply Like
  • Author’s reply » Thanks for your comments.

     

    I'm not bullish any manufacturing in Europe, but Chinese car manufacturing is still going strong and other Chinese industry will pick up after the government hand over once policy uncertainty clears a bit. Chinese growth could ramp up sooner as there is definitely room for policy easing, which would support gold too no doubt. I just think this is a good, medium term, risk reward trade as globally it's only Europe that is very weak. If oil prices keep rising (I'm bullish) there will be incentive to buy new more fuel efficient cars too. If things get bad in the economy, another cash-for-clunkers is another policy action we might see again. Additionally, South Africa issues give this trade extra upside risk, I think.
    14 Aug 2012, 02:19 PM Reply Like
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