Weakness in Platinum May Indicate Imminently Lower Gold and Silver Prices

by: Danny Furman

Stock traders often look to commodities markets to gauge demand relevant to specific sectors as well as inflation expectations. Silver, a high-conviction personal holding, is a commodity that trades with high volatility due to inconsistencies in demand across a wide spectrum of applications.

Chip, battery, construction and other industrial demand more than consumes recycled scrap silver each year. With new technology and integration of existing technology continually expanding silver demand, mining activity has accelerated in recent years.

A greater impact on the price of silver, since inflation concerns first ran wild in late 2007 and early 2008, has been made by investment demand. Bottoming under half a percent during the Y2K technology bubble, portfolios across the globe now hold just over one percent in precious metals. For the thousands of years gold and silver were legal tender prior to the establishment of the Petrodollar half a century ago, people generally kept them as 10-20% of net assets.

While a repatriation to gold and silver is underway, it is certainly not complete. An end to the constant fiscal support of the U.S. economy would leave the great debtor society cashless. The velocity of dollars would quickly head toward zero. In such circumstances, foreign holdings would need to be dumped on unwanting hands, and exporters to the United States would need to refuse the world reserve currency for inflation to continue at any rate.

While silver is my largest holding and highly correlates with inflation expectations and economic progress, the recent focus has been to the short side, based on deteriorating macroeconomic fundamentals as well as technical weakness across asset markets. Silver has had a strong correlation to short-term stock market direction over the last decade, yet the hard commodity has consistently outperformed over intermediate and longer time frames. Therefore, short positions can be viewed as PM hedges as well.

Gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) extended magnificent 2010 runs through April 2011 before suffering violent setbacks, and both remain over 50% above 2008 highs. Platinum, on the other hand, has yet to re-challenge an all-time high made in 2008. While not as popular as gold and silver among retail investors, JP Morgan (NYSE:JPM) among other major institutional players are notorious physical platinum bugs.

With so much interest from Main Street, perhaps gold and silver are no longer the leading indicators many customarily consider them. Indeed both have held tight ranges since falling hard in early May, indicating equal buying and selling pressure. Platinum, meanwhile, has hardly appreciated at any point since April 2010. Down $20 June 20, platinum (NYSE:PPLT) currently trades at $1731/oz, having traded between $1750-1850 for the majority of 2011. Could "the other white metal," with demand coming almost exclusively from advanced industrial manufacturing and institutional investment, be a more telling market predictor?

Depreciation in platinum amidst stock market weakness and rangebound trading for gold and silver has inspired me to reduce physical silver holdings slightly over the last week. The move is purely intended to take advantage of better prices on physical PMs and mining stocks in the near future. In addition to physical silver (NYSEARCA:PSLV), leading low cost producer Goldcorp (NYSE:GG) near $40/share is at the top of my buy list. Significant pull backs in other highly profitable leaders such as Barrick Gold (NYSE:ABX), Yamana (NYSE:AUY) and El Dorado Gold (NYSE:EGO), or promising exploration and development stage miners including Rubicon Minerals (RBY) and Jaguar Mining (NYSE:JAG), would also be buying opportunities.

Having dry powder ready when markets look shaky is simply a must. As many a wise investor have often said, crisis begets opportunity.

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