Saturday, January 10, 2009

Picture du Jour: Gold or platinum?

“Au” and “Pt” may be dull chemical elements, but gold and platinum have certainly played their respective parts during the unfolding of the financial crisis. Revisiting the metals’ movements, it is clear from the table below that gold’s decline was much smaller than that of platinum - as platinum suffered from the deterioration in the auto industry - but the recovery of gold has also been lesser than that of platinum.

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The weekly chart of platinum relative to gold illustrates the massive underperformance (declining green line) of platinum relative to gold from May to early December. However, platinum has since reversed course and outperformed (increasing green line) gold to the extent that it now commands a premium of 16% - up from parity in December.

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The red line shows the platinum price, having peaked in March 2008 at $2,251 and topped out relative to gold in May at a premium of 140%. Technical analysis-orientated readers will also notice the blue MACDhistograms moving into positive territory, indicating a buy signal for platinum in relative terms.

Although gold may experience a further pull-back in the short term (also as commodity index re-weightingruns its course), the longer-term outlook seems fairly positive as a result of a solid supply/demand situation, a likely waning appetite for US dollars and store-of-value considerations. According to theTelegraph, Merrill Lynch predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June. However, based on the relative chart above, platinum should have more upside potential than the yellow metal.

The magnitude of gold or platinum’s out- or underperformance will depend on a number of fundamental factors, as summarized by Rhona O’Connel, managing director of GFMS Analytics, in an article onMineweb.

• To what extent is the market discounting or overdiscounting a recovery in the auto sector, in the US in particular?

• To what level will the relative fortunes of the jewelry market help to sustain an outperformance by platinum over gold?

• When will the global economy start to stabilize and at what point does the market start to fear systemic inflation risks?

Although platinum does not have the same currency characteristics as gold, it could regain favor as a result of a revitalization of the platinum jewelry trade (especially in China) and tightening environmental restrictions. And let’s not forget that platinum is 30 times rarer than gold!

In short, there is a place for both gold and platinum in an investment portfolio, but be cognizant of the fact that precious metals are inherently volatile and are best bought following corrections. (The tickers for the gold and platinum ETFs are NYSE:GLD and LON:PHPT respectively. No platinum ETF is quoted in the US.)

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