The Platinum, Palladium and Gold Ratio in Focus

Includes: GLD, PALL, PPLT
by: Richard Bloch

Looking at the price of platinum recently, I’ve noticed that it seems to have stalled compared to gold. Year to date, gold is up about $100 per ounce, while platinum is down about $50. That means the ratio of platinum to gold is approaching what I usually see as a bottom – roughly 1.0.

Here’s a chart of both metals over three years along with the ratio between the two:

As you can see, in late 2008, the ratio bottomed out around 1.0 and then recovered to nearly 1.5 a little over a year ago. Will the ratio get there again? I’d say probably, but it’s hard to tell when. Platinum demand comes from both the industrial and the investment/jewelry sectors.

From an industrial standpoint, platinum is used to a great extent as an autocatalyst. But so is palladium, another platinum group metal. In fact, palladium has performed far better than platinum since 2008 – exceeding its 2008 highs by nearly $200 per ounce, as you can see here:

That’s because palladium is considered a superior autocatalyst in certain applications and its cheaper – for now anyway. There are many reasons why palladium is the better investment, but if platinum trades at parity to gold, I’m likely to add more to my holdings (I own all three – gold, platinum, and palladium). Why? Ounce for ounce, I just can’t see platinum trading much lower than gold. Yes, platinum is less popular than gold, but It’s hard to envision going to the jewelry store and being able to purchase a platinum piece for a whole lot less than a similar piece made of gold.

And in the industrial sector, to the extent that platinum can be substituted for palladium, platinum starts to become more economical if palladium prices continue to soar ever higher. (Palladium jewelry and investment demand is fairly minimal now, but that’s slowly changing.)

A long wait, but patience could pay off

If the boom in precious metals continues, I think platinum could easily gain on gold. One reason platinum group metal prices have stalled is the disruption in automobile production caused by the Japanese earthquake. As that situation resolves, both palladium and platinum demand should increase.

But if we see an economic slowdown, then we could be in for a long wait. Looking at platinum and gold over the really long term (like 50 years), platinum usually doesn’t trade for much less than gold, but when it does, it can trade at parity with gold for years on end.

Here’s a look at gold and platinum prices since 1960:

And for those like me who like to look at things logarithmically, here’s the same chart on a log scale:

Plotting the gold/platinum ratio over the decades, you can see that the ratio could easily rise to 1.5 or even 2.0 if history is any guide.

Selling some gold to buy platinum when the ratio is low, then replacing that platinum with gold again when the ratio gets higher could be a good move, but you might have to be really, really patient.

A little history lesson

Wondering why the platinum/gold ratio spiked to 7.0 back in 1968? Me too. This news article from the era is quite revealing:

Hard to believe isn’t it? U.S. citizens were forced to buy platinum and palladium in 1968 because they couldn’t buy gold. If you want to read the full article, it’s here. That’s an interesting history lesson, and it’s one reason why I am generally skeptical of any precious metal ratios prior to the mid-1970s when gold became “legal” again.

Disclosure: I am long PALL, PPLT, GLD.