Platinum And Palladium: Historical Prices And Prospects For 2017

| About: Sprott Physical (SPPP)
This article is now exclusive for PRO subscribers.

Summary

Platinum has become historically cheap compared to gold right now.

Palladium is performing better because manufacturers of catalytic converters increasingly prefer it as a lower cost replacement for platinum.

It appears likely that the platinum and palladium prices will continue to converge toward each other as demand shifts in the auto industry.

The Sprott Physical Platinum and Palladium Trust is a sensible way to invest in the two metals together.

The average of the platinum and palladium prices compared to gold is a way to measure their historical price range together.

Precious metals investors should always consider platinum (ETFS Physical Platinum Shares (NYSEARCA:PPLT)) as well as gold and silver in their portfolios. In recent years palladium (ETFS Physical Palladium Shares (NYSEARCA:PALL)) has become the fourth precious metal to invest in. This article discusses their history, prices, and prospects for 2017.

Platinum is worth particular attention right now because it has become historically cheap compared to gold. Traditionally, platinum has always been considered more valuable than gold. This fact is widely known and even present in popular culture: a Platinum album for a recording artist is a greater achievement than a Gold album; a Platinum level credit card has more benefits than a Gold one.

In the market, for most of the past 45 years the platinum price has fluctuated in a range from 1x to 1.5x the price of gold. But in 2015 and 2016, platinum has fallen well below the price of gold, to as low as 0.75 of the gold price and even slightly lower on multiple occasions this year.

The initial spark for the selloff of platinum in 2014 was probably connected with the collapse of the oil price and other commodity price declines. An apparent slowdown of industrial growth in China and elsewhere slashed the global demand for commodities in general. A major portion of the demand for platinum comes from industrial applications, above all in catalytic converters for autos. When global industrial activity slows down, the demand for platinum declines.

Furthermore, the platinum price suffered an additional decline in the fall of 2015 when Volkswagen was caught in the emissions testing scandal for its diesel cars. Platinum is still widely used in diesel catalytic converters, but cheaper palladium has been steadily replacing platinum in other catalytic converters. So if the market for diesel autos declines, that will hurt platinum demand in particular.

So, on the one hand platinum looks like a very appealing investment at a bargain price. On the other hand, investors may have a reasonable concern about the growing trend of palladium replacing platinum in catalytic converters, lowering the demand for platinum on a long-term basis.

Indeed, the palladium price has held up much better than platinum over the past few years. Palladium still declined along with other commodities in 2015, but this year it has rallied much more strongly than platinum:

Because palladium is still cheaper than platinum, it makes sense to expect that manufacturers will continue to prefer palladium for catalytic converters. Based on this shift in demand, it is logical to expect a gradual convergence of the platinum and palladium prices.

One way to invest in platinum and palladium together is via the Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP). This investment gives you exposure to the upside of both metals, without having to worry about changes in the relative demand for each of them in the manufacture of catalytic converters.

When you invest in platinum and palladium together, rather than look at their prices individually, you can focus on the average of the platinum and palladium prices compared to gold. In fact, over time we see that this value is usually far less volatile than either metal individually, because the average smooths out the price changes that occurred only as a result of relative changes in their use in manufacturing.

For example, in 1976 the platinum/gold ratio was 1.29 and the palladium/gold ratio was 0.41, but the average of the two ratios was 0.85. In 2014 platinum/gold was 1.09 and palladium/gold was 0.64, but the average ratio was 0.87, almost identical to that of four decades ago, despite the significant change in each ratio individually.

In general, the ratio of the platinum-palladium average to gold has tended to fluctuate in a range from about 0.65 to 0.95. It soared far higher in the palladium bubble of 2000-2001, but then returned to earth. Since the 2008 crash, it has returned to the same 0.65-0.95 range where it was in the 1990s and 1970s.

Since the launch of Sprott's SPPP trust in 2013, we can track the platinum-palladium average to gold ratio very conveniently on a stock chart: the ratio of SPPP to the Sprott Physical Gold Trust (NYSEARCA:PHYS).

We see that this ratio rose from 0.70 to 0.97 in 2014, then fell all the way below 0.60 this year. Now it is back around 0.65, but that is still near the low end of the historical range.

The combination of an inexpensive valuation compared to gold, along with the overall rising tide of precious metals right now, makes the SPPP platinum and palladium trust a very appealing investment over the coming years.

One final note: traders should be aware that it is much more difficult to speculate in platinum and palladium than it is in gold and silver. There are a small handful of platinum and palladium mining companies, but they pale in comparison to the many hundreds of senior and junior gold and silver miners. The market has a lot less speculative interest in them. As far as I am aware, there is not even an options market at all for platinum and palladium ETFs and funds. There is a futures market, and options on the futures, but that market is much less accessible to most investors and also requires much higher amounts of capital to participate in it. So platinum and palladium make more sense as basic investments in the metals themselves.

Disclosure: I am/we are long PHYS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a long position in SPPP over the next 72 hours.