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Playing Gold Platinum Spread With ETFs

|Includes: ProShares UltraShort Gold ETF (GLL), PPLT

The increased spread (difference in the price) between two instruments often creates interesting opportunities. Usually these situations are played by futures or CFDs but if you donĀ“t have a margin account you can also trade spread strategies by combining ETFs. Now let`s take a look at the background of the topic: what is gold platinum spread and why could it attractive today?

The Gold Platinum Spread is the difference in the price of these two precious metals which reached historic levels around -$350 per ounce. For each ounce of Gold you have to pay $350 more than for the same amount of platinum. Hence currently gold seems to be overvalued compared to platinum, in the terms of historical average spread between the two which is around $200 in favour of platinum.

Fundamentally the reason this gap will probably close in medium term are:

  • Platinum is app. 15 times rarer than Gold, while currently it`s $350/ounce cheaper. This will definitely attract spread traders.
  • In the last 25 years it happened only once that Platinum was more expensive than gold check spread chart here: http://www.denvergold.org/precious-metal-prices-charts/platinum-gold-spread/
  • Platinum is not only precious metal but it is heavily used in industry, especially in automobile catalytic converters, and there is a gap between demand and supply which can`t be covered from recycling, for more check out the post from Gianluca Guiso.
  • The Platinum is knocking on the door of the next bull market. It didn't pick up the momentum of Gold yet, but it`s currently testing an important resistance to confirm a higher high = bear market reversal.

So how to play this spread game without a margin account. Traders who trade Inter Market Spreads use similar situations to profit from the tightening of this spread by selling one instrument and buying the other one. The ultimate solution for a non-margin account is to use ETFs which are short and long on the respective instruments. The position size should be defined by the same notional amount.

As the Gold seems to be overvalued compared to Platinum we can buy the following types of ETFs and hold for a few month, max a year:

Buy a Short Gold ETF

Buy a Long Platinum ETF

How to maintain the ratio?

Example :

LONG LEG: You decided to go long Platinum through a non-leveraged ETF with a ticker PPLT 100 @ 104.83, total notional $10,483

SHORT LEG: Now you need to cover the other side by buying a short gold ETF, however you can hardly find one without leverage. Doesn`t matter, zou can use leveraged one but with respected notional. For example you found GLL a 2xshort Gold ETF which means it will change vaue twice as fast as the underlying.

To achieve the needed position size, you take the notional 10,483 divide by 2 so you need to open a position with app. $ 5,241 notional value. This gives you 79 GLL @ $66.20, total $5,230.

Risk Management:

First of all manage your risk with appropriate positions sizing as this strategy doesn`t use stop loss orders. The idea behind is that the long Platinum position is hedged by the short Gold position. However this is not the ultimate protection.

If the spread is widening you need to act. If the spread reaches back the highs from end of June and close above, close both positions.

Possible targets:

If the spread reaches $0, so the two metals will have the same price, you reached your first target. Your second target is where the average spread is, at $180.

Hope this helps.

Watch your risk and be consistent!

Mr. TechMan

may find useful a great article published back in 2014 by David Jackson on how to trade ETFs you :

seekingalpha.com/article/15243-etf-inves...

Additional disclosure: Personal disclaimer: I can`t use my real name due to my current circumstances. This is my personal market view and it shouldn`t be taken as investment advice. I already traded this strategy through CFDs this week and expect to add to my position after the weekly close if the spread will close tighter than the last weeks close. Trading financial instruments involve significant risks so before you decide to trade, you may find it useful to ask a financial professional for advice.