I will be looking at initiating a relative value trade between gold and platinum. I would buy platinum and short gold. I believe this trade has relatively "limited" amount of downside (obviously in this market nothing is limited). I think if precious metals continue to fall, gold will sell-off more than platinum or in the situation that we have a reversal, I think platinum will perform better to the upside. I don’t have opinion or handle on timing for this trade and would be open to suggestions.
Numbers:
- Platinum is down -48% YTD and is down -65% from its recent highs vs. Gold only down -12% YTD
- Spot platinum is currently trading at only an 8.5% premium to spot gold
- Since 1987, platinum has traded at an average premium to gold of 47%
- It traded at a 139% premium as recently as May of this year
- Platinum did trade very close to gold between 1991-1996 but still average a 5% during that time period
- The outlier occurred in 1992 when platinum traded at a 7% discount
Since 1987 there have been 2 periods where it has traded at a discount: 08/06/91-09/11/91 and 12/18/91-02/05/92
Fundamentals:
- Platinum is 30x more rare than gold
- South Africa has 80% of the world’s platinum supply with the balance mainly coming from Russia, USA, Canada, and Zimbabwe
- Gold is much more common and is found on every continent: South Africa=12%, Australia=11%, US=10%, China=9%, Russia=7%, Indonesia=6%, Canada=5%
- Platinum demand is as follows: 50% jewelry, 20% auto catalysts, with the balance coming from HDD coating, fiber optic cables, explosives, spark plugs, etc
- Gold demand is as follows: 65% jewelry, 16% industrial and dental, 10% bars & coins, and 10% ETFs
- Its takes 10 tons of mined ore to produce 1oz of pure platinum…this process takes 5 months to do
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