The keener readers of these pages will remember a year I ago I recommended a “trade of the lustrum”.
A lustrum, by the way, is a five-year period.
Oil, at just over $30 per barrel, was the recommended trade. So far it’s working out.
Today I have another trade of the lustrum for you.
Platinum looks dirt cheap compared to gold
I want to start by looking at the chart below, which shows the ratio of gold to platinum since 1970.
The green band marks the range of this ratio. When the red line is at the top of that range, platinum is cheap and gold is expensive (relative to each other). When the red line is at the bottom of the range, gold is cheap and platinum is expensive.
At present we are near the top of that range.
An ounce of gold is – give or take – $1,200, while platinum sits at just below $1,000. So the gold price is 1.2 times that of platinum. The all-time high – at least since the great monetary reset of 1971 – is 1.4 times. This occurred in 1983.
Meanwhile, in 2008, platinum went to almost $2,300 an ounce. The gold price was just over $1,000 at the time. In other words, an ounce of gold was worth less than half an ounce of platinum. Now an ounce is more expensive.
The trade then was to sell platinum and buy gold with the money.
The trade now is the opposite of that – to sell gold and buy platinum.
This is not me making a bearish call on gold, by the way. This theme of social division, which I mentioned last week, has not gone away. In fact, in the space of just seven days, thanks to the US immigration fiasco, it has got worse. It’s here for the time being and I don’t really see it getting much better. Moreover, there is the gold-bullish possibility of inflation making a return.
But these same factors that will push the gold price up, should also push up the platinum price – or at least they shouldn’t negatively affect it. Platinum is a precious, hard asset and hard assets do well in inflationary scenarios.
There is also the added possibility that what seems like a permanent supply deficit in platinum may actually start to count for something in terms of pushing up the platinum price. There’s also the fact that platinum is sitting below its cost of production, an anomaly which should eventually right itself.
My main concern with platinum is that demand will fall, due to falling demand for diesel catalytic converters with the onset of electric cars, self-driving cars and this general change of sentiment towards diesel engines after the Volkswagen scandal. (A higher oil price might boost demand for diesel, but we will wait and see about that.)
All in all, platinum needs a better story. But narratives often develop with a rising price, so it may be that we get that narrative further down the road.
The other possibility is that gold falls, of course, and that’s a very real possibility. Should that be the case, I would argue that the platinum price will not fall by as much as the price of gold, for the reasons stated above.
Why platinum looks a great bet now
Below is a long time chart of the platinum price, again courtesy of Nick Laird, on which he has outlined, with a green band, the likely range. Again you can see that platinum is on the cheap side of things.
Even if the gold price stays where it is, but the ratio of platinum to gold goes back to its longer-term average, you are still looking at some upside.
My colleague Charlie Morris, who is the man who put me onto this idea in his excellent Fleet Street Letter, calculates that the 20-year average ratio between the two metals is 0.75.
An ounce of gold, in other words, should cost about three quarters the price of an ounce of platinum. A reversion to that mean would currently give us a platinum price of $1,600. In other words, even if gold stays where it is, platinum could rise by 60% and nothing particularly abnormal would have occurred.
Platinum jewellery demand should remain constant, if not grow. Given the choice between a platinum or a gold ring, I think most people would choose the platinum, particularly if it is cheaper.
That’s because, in the human psyche, platinum is more valuable than gold. Thus a platinum credit card has a higher ranking than a gold. A musician craves platinum album sales certification above gold.
The fact that platinum is cheaper than gold goes against this psychology. It won’t be the case forever. It might not change tomorrow, but it will change. So sell your gold (some of it, anyway) and buy platinum with the money – another trade of the lustrum for you.