Platinum vs. Gold 2017 Spread Provides Unique Opportunity
When the thought of precious metals pops up, almost always two names spring to mind: gold and silver. Platinum is often lost in the conversation, but it’s trading at historic discounts to gold, which could present an opportunity to investors.
Platinum has certain endemic qualities beyond being “precious” that differentiate it from gold. Ultimately, the price narrative between platinum vs. gold 2017 is really about whether global growth rebounds or whether economic instability dominates. With the global inflation trade in full swing, this may present a prime “buy low” opportunity.
Platinum vs. gold, which is more expensive? Historically, it has been the former, with platinum prices trading at a premium 95% of the time since 1971. Lately, the two metals have alternated in a leading price position, sometimes in multi-year spurts. As of this writing, it’s gold by about 24%, with gold at $1,251 per ounce and platinum at $949.00. Since 2016, gold has taken a clear price lead.
As it stands, the platinum/gold ratio is around 0.7, which makes platinum cheap by historical standards. As the table below shows, the platinum/gold ratio has only traded 0.85 for 4.7 months going back to 1971. That’s a full 551 months’ worth of data, and platinum has only traded in this outlier ratio less than one percent of the time. This is quite unusual, and indicates that platinum is severely undervalued in comparison to gold.
Does this mean investors should start dumping gold and piling into platinum? It certainly seems that way, in light of global reflation expectations in full swing.
When assessing the platinum vs. gold 2017 outlook, it’s important to understand that both metals are driven primarily by different fundamentals. Gold will forever possess a universal appeal as a store of value unmatched by any other asset. Civilizations have used gold as currency or wealth preservation vehicle since roughly 600 B.C.
| Ratio | % of Months |
| <0.85 | 4.7 |
| .85-1.0 | 15.0 |
| 1.0-1.25 | 34.7 |
| 1.25-1.5 | 19.3 |
| 1.5-2.0 | 15.4 |
| 2.0-2.5 | 8.9 |
| >2.5 | 2.0 |
(Source: “The 46-Year Record of Platinum-Gold Ratios,” Kitco, February 28, 2017.)
And, despite the advent of alternative forms of currency and payment systems, gold is still king even today. Thus, gold prices 2017 and beyond are heavily influenced by jewelry demand (used as a form of wealth preservation in many societies) and central bank/private investment demand. Gold also has some industrial and aerospace applications, but they form only a small slice of overall demand.
Platinum prices 2017 and beyond are much more influenced by the business cycle than gold. It’s more or less an even distribution between end product demand and private investor demand. Despite the metal’s high cost, engineers still haven’t found a cheaper viable alternative to platinum in catalytic converters. It’s still among the most efficient alloys to reduce harmful emission byproducts after the incomplete combustion of fossil fuels.
Gold and Platinum Uses (As of 2013)
| Uses | Platinum | Gold |
| Catalytic Converters | 36% | – |
| Jewelry | 31% | 52% |
| Investment/Other | 23% | 16% |
| Central Banks | – | 18% |
| Industrial | 10% | 12% |
| Unaccounted | – | 2% |
(Source: “U.S. Geological Survey National Minerals Information Center,” U.S. Geological Survey, last accessed March 30, 2017.)
Being more end-product-centric has its advantages. During periods of elevated world industrial activity; specifically when more vehicles are produced and purchased, platinum prices may be generally more supported than gold prices, which investors shun in good economic times anyway.
However, the flipside is that platinum generally falls out of favor during poor world economic conditions, when end demand for catalytic converters and industrial equipment levels off.
Since platinum is more scarce than gold, with about 10 times less of it mined every year, the price is susceptible to mining-related issues like strikes or mine closures. Supply dynamics have been tight for several years, with 400,000–600,000 ounce shortfalls seen in the past six years.
Furthermore, some key centers of production lie in politically unstable locations like South Africa. They are places were miners get paid $10.00 per day and don’t always remain complacent about their working conditions. These events can flare up at any time, without warning, sending platinum prices soaring. Gold can soar as well, but it does not have this risk premium built-in.
Adding further fuel to demand, vehicle sales in China jumped 13.7% in 2016, or about double overall gross domestic product (GDP) growth, owing to tax cuts on small-engine cars. Recycling in the Chinese auto market is nearly non-existent at this stage, so not much platinum gets recycled. Thus, there’s a constant influx of demand for new supply, and there is a shortage of significant ore-producing projects at the moment. The Chinese auto market is expected to grow another five percent in 2017.
The world catalytic market is expecting brisk growth for the next decade. The exhaust conversion market is expected to grow to $272.9 billion by 2025, or around 113% from today’s levels. Sector growth rates look rosy. (Source: “Automotive Catalytic Converter Market Worth $273 Billion By 2024,” Grand View Research, last accessed March 30, 2017.)
As tempting as these catalysts and seemingly-favorable dynamics look, there are a few notable drawbacks to platinum.
For one, although platinum is a great oxidation catalyst to reduce toxic emissions from tailpipes, so are palladium and rhodium. The metal is competing in a cost-sensitive industry with two other viable alternatives. Manufacturers will use the cheapest alternative and the one most available. At the moment, it’s palladium, which is currently trading at a $150.00 discount to platinum.
Rhodium also exhibits a greater efficiency towards the removal of nasty combustion emissions, and is thereby the preferred choice in an “all things equal” scenario. Rhodium already accounts for greater than 40% of the market, and that’s expected to increase over the next eight years. (Source: Ibid.)
Despite the fast growth, the growing usage of hybrid and electric vehicles is anticipated to cut into growth more down the line. Emissions are much less in these vehicles, reducing the need for platinum group metal (PGM) alloys. It’s something to keep in mind when assessing platinum’s potential for future price expansion.
Again, gold does not have these business cycle headwinds associated with it. It’s best to keep supply dynamics in mind as the reason for our bearish platinum price forecast 2017.
Final Words on Platinum vs. Gold 2017
Despite the fact that U.S. consumer confidence is soaring, and reflation expectations are picking up, the platinum market doesn’t seem to be getting the memo so far. Through the first quarter (Q1) of 2017, the spread between gold and platinum prices has actually widened.
The platinum vs. gold 2017 spread started out at $205.20 and has risen to $302.10 as of this writing, a whopping 47.2% increase. This is not far away from the record 26% ($331.00) premium that gold held over platinum in mid-June 2016, which was the lowest platinum traded relative to gold in at least 116 years. Herein lies the opportunity.
Gold, on the other hand, is off to modest gains in 2017. It has risen around $40.00 so far in 2017, or about 3.3%. It has weathered the first in a series of potential rate hikes and expectations of an economic rebound. It has maintained a consistent bid, despite the lackluster gains. This comes on the heels of a solid 2016; gold finished the year ahead 8.5% at $1,151 an ounce. All things equal, it had been one of the worthy precious metals to invest in 2017; expect further momentum in the gold price forecast 2017.
Major central banks continue to purchase gold, providing ongoing demand which isn’t cyclical. For example, Russia has added 407.5 tonnes of gold to its reserves just between the period of March 2015 and November 2016 alone. This is an acceleration of purchases, which has seen Russia purchase north of 1,220 tonnes since January 2002. (Source: “Changes in World Gold Official Reserves,” World Gold Council, March 9, 2017.)
Not coincidentally, the Russian ruble has rallied massively since the upswing in gold reserve purchases starting in March 2015. At that time, it took 80 rubles to purchase one U.S. dollar. Today it takes only about 57 rubles. That’s a decrease of 28.7%, and enough to make the ruble among the world’s strongest currencies during that period.
With results like this, central bank demand for gold is only likely to increase in the future. That is, when central banks finally realize that intentionally weakening your currencies for near-term export increases is a zero-sum game, and is actually destructive in the medium term. If experts are correct about the voracity of the global reflation trade picking up steam, central banks will find out this fact soon enough.
In terms of ways to invest, the platinum vs. gold 2017 advantage still resides with gold. There are numerous ways to invest in gold that offer different options over platinum. Six of the best ways to invest in gold include physical gold (bullion and coins), gold exchange traded funds (ETFs), gold mining stocks, gold mutual funds, options, futures, and new-age gold and payment platform “GoldMoney.”
Platinum does not offer nearly the same number of venues to acquire the metal outside its physical form. Yes, there is a futures contract and several ETFs that investors can trade, including the iPath Bloomberg Platinum Subindex Total Return SM ETN (NYSEARCA:PGM), but these are thinly traded and prone to whipsaw and commission slippage.
In the end, my precious metal analysis is bullish in 2017. With all the looming negative economic and global catalysts, including the potential for inflation, trade wars, military wars, persistent over-indebtedness, overvalued equity markets, runaway budget spending, monetary debasement, currency wars, etc., precious metals deserve an outsized allocation in most portfolios. Gold can skyrocket on a moment’s notice on any calamity pertaining to the above factors, while platinum would soar along with it.
For investors contemplating an either/or investment decision, we favor platinum’s exposure to both cataclysmic events as a precious metal, and industrial catalysts pertaining to the reflation trade. Both are great assets for 2017, but the historically wide spreads offer extra potential upside should the platinum/gold ratio narrow to established norms.