How to play the price of platinum

published 27 January 2012

As regular readers will know, we're fans of gold here at MoneyWeek; but could platinum be a better bet in 2012? Look at the chart below. It shows the ratio of the price of platinum compared to the price of gold (both in ounces). When the ratio is above one, platinum is more expensive than gold, which is typically the case because platinum is the rarer metal.

However, that relationship has broken down recently. Platinum is now trading at a discount to gold indeed, it hasn't been this cheap relative to gold for around 26 years. So is now a good time to buy?

As with most things, the price of platinum is determined by demand and supply. On the demand side, the main use of platinum is for catalytic converters in engines, so a lot depends on the health of the car market.

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Research group IHS Automotive expects global light vehicle sales to rise 4% to 78 million in 2012, but notes that a deepening crisis in the eurozone could have a negative impact.

But at the same time, with emissions standards tightening, there seems to be some demand support for platinum. On the supply side, the price of platinum is now at, or below, the cost of production. That means miners have little incentive to produce more. This could hit supply, pushing the price higher.

That sounds like a pretty bullish picture to us. If you agree, the easiest way to get exposure to platinum is via an exchange-traded fund, such as ETFS Physical Platinum (LSE: PHPT).

A more geared play would be through shares in a platinum miner, such as Anglo American (LSE:AAL) or Lonmin (LSE: LMI), or Johnson Matthey (LSE: JMAT), the top distributor of platinum group metals.

Of course, there's a further way for the platinum/gold ratio to revert to normal' levels. If there's another big market panic, we could see a 2008-style sell-off in precious metals.

Theoretically, the gold price could fall faster than that of platinum. The ratio would rise, but an investor in platinum would still lose money.

We are still bullish on gold, so this concerns us less in the long run, but if you are comfortable with spread betting, you could try a pairs trade', whereby you sell gold and buy platinum in proportion to one another. This way, it doesn't matter what happens to the individual metal prices, you make money as long as the gap between the two shrinks (ie, the ratio rises) and lose it if the gap widens (ie, the ratio falls).

This article was originally published in MoneyWeek magazine issue number 573 on 27 January 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.