Platinum: Why all that glitters isn’t (always) gold

23rd August 2011

Platinum engagement rings are substantially pricier than the now popular white gold (forget yellow, it's so last century).

A platinum disc means a musician has sold more records than one that is merely gold.

When banks differentiate between grades of credit card, they pitch platinum – rather than gold –  at higher-worth customers.

And if not too much gold is mined each year, it's still a lot compared with platinum.

Or at least, that's what most people think. 

Over the past few weeks, they will have needed to look again at the platinum vs gold relationship. 

For as gold continues to break price records on an almost daily basis (although it is still some $500 from its all time high over 30 years ago once inflation is factored in), it is trading on a level with platinum and sometimes even higher despite platinum's perceived greater value.

The price of both metals changes on a minute to minute basis – the more so at this holiday  time of the year when trading levels are thin so a slight tilt in demand can have a greater than normal impact – but stepping back from the market noise (looking at how prices have averaged for instance) shows how the expected relationship has broken down.

Both gold and platinum have hit $1,900 an ounce over the past few days and continue to trade around those levels.

Rewind to early 2008, when gold was trading at around a then record $900 an ounce, and the expected relationship to platinum was clear.

Platinum hit $2,200 an ounce. 

But since then gold has moved to around a one-to-one parity. It is the gold price that is now driving platinum.

Gold is benefiting from its status as the final safe haven in a dangerous financial world.

Ultimately, investors can carry it around with them in the shape of coins or jewellery.

Although both are very precious metals, investors have so far sidelined platinum in favour of the more tradeable gold.

And that could mean that interest moves from gold to platinum, presenting potential buying opportunities especially for those who believe gold is overvalued and that the higher it rises, the more the potential for what they see as a bubble to burst.

The history of the relationship between gold and platinum shows the former soars during times of economic turmoil while the latter benefits from a more stable scene.

When times are good, platinum trades typically at twice the price of gold.

Platinum is used in a number of high tech industries ranging from specialist wires to state of the art medical instruments.

So from the long term perspective, platinum could look cheap compared to gold. But nearer in, there's a risk in both.

The risk in gold is that whatever the bulls say, the bears are right – it is overpriced, it has discounted all the bad news in the market and then some more, that comparisons with the 17 times increase in the1970s are misplaced as this came after gold had been artificially held to $35 an ounce for some 35 years, and that those in early will soon  rush to take profits.

But the drawback with platinum is that investors now perceive it as an industrial metal where demand has fallen against gold which now appears to be taking on a life of its own as a currency given the turmoil in the US dollar and the euro.

While a ratio at or near 1:1 is seen as a good buying opportunity for platinum – demand for which could potentially drive the price higher and widen the ratio once again –  analysts say the metals are likely to hold near parity in the short term as gold continues to benefit from global economic uncertainty.

"I can't see any reason for a reversal of the relationship while Italy and Spain are vulnerable in the eurozone, and there is the chance that other agencies will downgrade the U.S. Everybody is selling out of risk and the macro issues supporting gold remain," says Societe Generale metals analyst David Wilson.

Schroder Alternative Solutions Gold and Precious Metals fund can invest up to 33% of its portfolio into metals other than gold. But currently, it has a 98% exposure to the price of gold.

"Platinum is just one per cent of the fund," says manager Paula Bujia.

"Platinum (and palladium) have a higher percentage of industrial use than gold and we're cautious for now. Platinum will benefit from stricter emission controls (one of its industrial usages) and supply constraints in South Africa where 90% of the metal is produced"

"But the time to hold more of platinum and other metals will be at a time when risk assets (such as equities) are doing well."

 Meanwhile, how do investors who buy into the platinum get into the metal?

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