Extreme Opportunity In Platinum

Summary

• Platinum is extremely undervalued relative to most financial and physical assets.
• Platinum crashes during the US recessions and the periods of global economic weakness in conjunction with a stronger US dollar.
• The current macro environment makes it likely that the recent spike in platinum will continue.

Photo by JulyVelchev/iStock via Getty Images

Platinum is relatively undervalued

As I previously noted, platinum is currently extremely undervalued relative to gold (GLD) as well as to the stock market. The relative valuation analysis would also show that platinum is extremely undervalued relative to copper, and most other commodities.

The relative valuation analysis is useful - the same macroeconomic variables should equally affect all financial and real assets, and on average the historical ratios should be mean-reverting considering the lead-lag effects in different markets.

Thus, given the apparent inefficiency in platinum, the long platinum trade presents an extreme opportunity for an outsized gains, at least until the price of platinum significantly narrows the gap with the price of gold.

However, it is important to understand the risks - specifically the risk of entering a concentrated long platinum position, and shortly after witnessing a crash (in the price of platinum). I look at the historical chart of platinum, and simply analyze the long term behavior of the price of platinum - specifically focusing on the prolonged periods when the price of platinum falls.

Platinum: 10 major crashes since late 1960s

The chart below shows the historical price of platinum since late 1960s. The price of platinum has been rising only gradually. However, the volatility has been extreme - platinum has a tendency to spike and crash. In fact, there have been ten major crashes:

1. The recession of 1969 crash of -69%.
2. The recession of 1974 crash of -41%.
3. The recession periods from 1979 to 1983 crash of -71%
4. The crash of -38% from Sep 1983 to Jan 1985 - no US recession, but the spike in US dollar.
5. The recession of 1991 crash of -27%.
6. The recession of 2001 crash of -32%.
7. The recession on 2008 crash of -63%
8. The period from 2011 to 2016 bear market of -60% - no US recession, but recessions in other parts of the world, and strong US dollar.
9. The period from Aug 2016 to Aug 2018 crash of -32% - no US recession but strong US dollar and weak global economic growth.
10. The recession of 2020 crash of -40%.

The analysis shows that platinum crashes: 1) during US recessions (7 crashes out of 10) 2) strong US dollar periods (like 1983-85 and 2012-2018) and 3) periods of weak global economic growth, which are also the periods of US dollar strength. Also note the long term range in platinum during the 1990s during the periods of the Asian crises in 1997, the Russian default in 1998, and a general US dollar strength period.

Implications

Obviously, we are currently in the spike stage. The question is when is the crash coming (and it's coming)? Based on the above analysis, the platinum spike will continue until the next US recession. Given that the US economy is just getting out of the 2020 recession, and given the abundant fiscal and monetary policy support, the probability of the next recession within next 12-18 months is probably zero. Thus, the platinum spike is likely to continue.

However, a strengthening US dollar can also cause the crash in platinum, but this has to be in conjunction with a weak global economic growth or the financial crisis in emerging markets. At this point, and given the post-pandemic expectations, the policy support is strong everywhere - so it is reasonable to expect a strong global economic growth - and with that a clear path for the continuing spike in platinum.

Specific fundamental considerations

The extreme relative undervaluation of platinum to most financial and physical assets happened during the period from 2012 to 2018. Specifically, demand for platinum plunged in 2015 after the diesel-gate scandal - which is a platinum-specific event, not related to systematic factors.

Obviously, the platinum-specific demand issue has to be resolved before platinum price can continue to spike higher. Among other catalysts, the major fundamental longer-term catalysis for platinum will come from the green hydrogen economy, given the recent global governments actions to solve the climate change issue.

How to play the extreme opportunity in platinum?

Professionals can take the long positions on platinum futures. However, the high leverage and low liquidity of platinum futures makes it a very volatile strategy. Individual investors should rather consider buying the Aberdeen Standard Physical Platinum Shares ETF (PPLT).

The Aberdeen Standard Physical Platinum Shares ETF hold 100% physical platinum bullion. The expense ratio is 0.60%, and the current assets under management are at $1.47B.

The chart below shows the 1-year chart for PPLT. The uptrend is intact, and currently PPLT is right at the key 50-day MA support. The successful defense of the uptrend at the current support level will likely push PPLT to new highs of the recent trend - the spike continues.

The risk at this point is related to the strengthening US dollar (UUP), which could cause a breach the key support and delay the expected spike in platinum.

Given the arguments and the analysis presented in this article, I am bullish on PPLT.

Data by YCharts

Analyst’s Disclosure: I am/we are long XPTUSD:CUR. 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.