The Ultimate Precious Metals Showdown: Gold Vs. Platinum

Includes: GLD, PPLT
by: The Financial Lexicon

In one corner we have gold, the soft and shiny metal whose aura has lasted the ages. It’s currently favored by central banks, Treasury bond haters, and jewelry lovers, and hated by all things status quo and the establishment. In the other corner we have platinum, whose rarity on earth gold can only envy. It is the metal that King Louis XVI of France is said to have called the “only metal fit for a king.” Traditionally, platinum’s kingly status has afforded it a premium to gold. But times have recently changed.

Have you noticed the platinum-to-gold price inversion that’s developed over the past few months? Gold has traded at a premium to platinum in the past, although from what I can find, not to the extent the pair is inverted today. Currently, spot platinum is trading at $1,594.00, while spot gold is at $1,716.30. The 7.67% premium of gold to platinum has actually contracted since the week of October 16 when it was much closer to 10%. Both metals have moved higher since that time, but platinum has done so at a faster clip than gold.

While it is tempting for anyone interested in purchasing precious metals to jump into platinum rather than gold given the current price inversion, before doing so, it is worth considering why investors and traders are purchasing gold, and which metal may be stronger under various future economic circumstances.

In order to figure out whether gold’s premium over platinum is something that might last, let’s ask ourselves why gold is being bought. Typically, when attempting to figure out why an asset’s price is going higher, people will look at supply and demand dynamics. In the case of gold, there is a lot of discussion surrounding demand from central banks and demand from the SPDR Gold Shares (GLD), as well as other exchange traded funds/notes (ETFs/ETNs) allowing virtually anyone to have easy access to the metal. It is true that platinum also has an ETF, the ETFS Physical Platinum Shares (PPLT). However, this fund has been around for less than two years and is far less liquid and popular than the GLD. So, while demand from central banks and the GLD are among the reasons spot gold has been going higher versus all fiat currencies over the past decade, it doesn’t help us understand why gold is actually being bought.

I am of the opinion that gold’s massive move from approximately $700 per troy ounce to today’s $1,700 per troy ounce over the past few years has been largely driven by a number of investors, including central banks, buying gold purely as a store of value. It acts as a hedge against fiat currencies.

This helps explain why it is that regardless of whether economic data has been inflationary or deflationary over the past few years, the only thing that seemed to bring gold down during that time period was margin increases in the metal or selling gold to fund margin obligations in other assets. Along with central banks and other investors using gold as a hedge against fiat currencies, there are some investors who simply chase the price of gold higher or buy into the ETFs because they want commodity exposure for any number of reasons.

If gold’s special place in history as a store of value is helping to drive the demand that is pushing prices higher, it is understandable why platinum has been lagging of late as compared to gold. As the world experiences more and more quantitative easing and ever bigger bailouts, it makes sense that gold in particular is catching a strong bid. Perhaps platinum will one day be thought of in a similar manner to gold, but that time has yet to arrive for the rarest of the three popular precious metals (silver being the third).

With all of this in mind, in order to choose one over the other (gold or platinum), you need to decide how you view the future of fiat currencies. If fiat money can survive the sovereign debt crisis and deleveraging period we seem to be going through, then platinum might be the better bet as the world learns to grow organically; meaning without excessive conventional and unconventional monetary easing. In such a scenario, the spread should once again revert to an historical norm, meaning platinum would outperform gold regardless of whether both metals rise or fall from current levels.

However, if fiat currencies do not survive the ongoing financial crisis in their current forms, then gold, due to the reasons outlined above, is likely to outperform platinum. Although, platinum certainly has a role in a world in which fiat currencies fail and people want to own “stuff.” It could be argued that once currencies are reset to new sustainable levels, platinum will again trade at a higher price than gold, and is, therefore, currently the better buy.

Under a scenario in which the current crisis drags on and on for decades to come, lasting one’s entire life, then it makes sense to favor gold, despite the fact that the ultimate outcome could favor platinum, as outlined in the previous paragraph.

Finally, before deciding that platinum is the better buy over gold because of any of the reasons previously discussed in this article, it is also worth considering the scenario playing itself out in the oil markets. During the course of 2011, the WTI-to-Brent crude oil spread not only inverted, but it inverted in a big way. No matter how hard traders tried to close that spread by going long WTI and short Brent, the spread kept getting larger.

One can debate the reasons for the $20 plus inversion, although perhaps the spread kept getting larger precisely because so many people were trying to close it. Crude oil traders aren’t exactly known as the buy-and-hold type. So, as more and more traders got long WTI and short Brent, and the spread did not close, perhaps the eventual unwinding of their positions forced the spread even wider.

Regardless of whether this type of trade caused the continued expansion of the Brent premium over WTI, the fact that it kept getting larger and has stayed at elevated levels is something that should not be overlooked by precious metals investors/traders in the platinum and gold markets.

Disclosure: I am long gold, silver, and platinum.