What will it take for platinum to make a comeback?

Platinum bars © Kerem Uzel/Bloomberg via Getty Images

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Let me ask you a question: “Which is more expensive? Gold or platinum?”

It’s a question I often ask in my financial gameshow. And I’d say that between 75% and 80% of people say platinum.

Platinum is more expensive than gold – everybody knows that. That’s why platinum album sales rank higher than gold and silver, and why a platinum credit card is higher status than gold.

Except that platinum isn’t more expensive. One of the many economic oddities of today is that gold is.

Gold is much more expensive than platinum

Today gold costs $1,505/oz, while platinum is a mere $940/oz. Gold is more than one and a half times the price of platinum. Usually, platinum would be about 1.25 times the price of gold. That’s the historic average.

I’ve been banging the drum about this anomaly for a couple of years now. I may as well have been howling at the moon, for all markets seem to care.

Surely a viable long-term trade has to be sell gold, buy platinum. You’d’ve thought so, but it hasn’t worked since I first recommended it back in 2018 (or possibly earlier).

Here we see the gold-platinum ratio since 1900. A hundred and nineteen years of data in one chart – how about that?

Gold/platinum ratio chart

It’s the highest it’s ever been and it keeps getting higher.

(NB When the chart is rising, the gold price is appreciating faster than the platinum and vice versa.)

In August, on an intraday basis, that ratio actually went to 1.8 times, it has since pulled back to around 1.6 times. The long-term average is, as I say, somewhere around 0.8 times.

Why platinum bulls need to pay attention to car manufacturing

The cause of all this, of course, goes back to the Volkswagen diesel scandal and the subsequent change in both attitude and regulation towards diesel vehicles in Europe. Diesel is not as clean as it was made out to be, runs the thinking, and as a result, demand for platinum, whose main use is in diesel catalytic converters, has fallen.

At the beginning of August, platinum was just $840/oz. It had a belting run to about $980/oz by early September, carried up on the wings of gold, so to speak, and since September, has slid back to about $940/oz.

Shortly before platinum’s spike to $980/oz, on 28 August, the Chinese State Council said that local governments that have restrictions in place on vehicle sales should consider relaxing or even removing those curbs. The proposal to loosen restrictions on vehicle purchases is is presumably part of a plan to stimulate growth, amid China’s ongoing trade spat with the US

Analysts at Bank of America “expect policy loosening to resume in infrastructure investment, consumption stimulus and monetary easing.” If their expectation proves right, it might not set the platinum price on fire, but it would certainly give it some sparkle. (Copper would be the more obvious play.)

Last week the World Platinum Investment Council (WPIC) published its second-quarter Platinum Quarterly, which forecast a 9% increase in total platinum demand in 2019. Investment demand has offset falling demand in the automotive and jewellery industries (down by around 4% and 5% respectively).

There was a surge in investment demand in the first half of 2019 with some 750,000 ounces in increased exchange-traded fund (ETF) holdings. Presumably, funds and other investors are seeing the same extraordinarily cheap prices as me. The problem with ETFs is that they are as easy to sell as they are to buy, so they are not what you’d call strong hands. Real industrial demand is more compelling.

That 9% forecast rise in platinum demand is still greater than the 4% rise in production, which would suggest that the sub-$800/oz prices we saw in 2018-2019 are now behind us.

If anything, it is almost certainly the automotive industry that is going to “save” platinum and get it back to the historically norm of 1.25 times the gold price. Independent evidence is beginning to emerge of exceptionally low nitrous oxide (NOx) and CO2 emissions from new diesel cars. That could change perceptions. Carmakers in Europe will have to cut their fleet emissions to avoid fines, and improved diesel tech could play an important role in that.

Perhaps more exciting than new, improved diesel engines, are fuel-cell electric cars and trucks – even trains and trams. There has definitely been an increase in positive newsflow on this front. If the ultimate goal is zero on-road emissions, then fuel cell electric vehicles may be an important part of the solution, and platinum will be part of that.

I’m not an all-out bull in the short term. I can easily see a move back to the $850/oz area, especially if gold has a correction. But I remain convinced that platinum bought in 2019 with a three-to-five-year time horizon will pay dividends.

My eventual target is the long-term average of 1.25 times the gold price. With gold at around $1,500, that would mean a platinum price in the $1,900 area. Double that of today.

At various times in the 2000s, platinum was twice the price of gold. A return to that level would suggest a platinum price of around $3,000.

Platinum bugs should pray that fuel cell tech takes off.