Regular readers will know that we primarily focus on gold and silver here in these columns. The reason for this is that gold and silver are historically dual monetary metals, with thousands of years of history of use as money since the dawn of civilization. No other commodities have stood the test of time as lasting stores of wealth in such unique ways. However, is it time for us to consider the “other” precious metals? In this article, we will examine the technical case for investment into an often-overlooked asset: platinum.

The Analysis

Platinum sees most of its demand come from automobile usage (41%) and jewelry (27%) as of 2018.

Investment demand is highly variable. For example, in 2018 the investment demand comprised only 4% of the total 7,933 metric tonnes purchased or 292 tonnes. However, as recently as 2015, total investment demand was nearly double that of 582 tonnes. Still, that figure only represented 7% of the total demand component for that year.

With so little platinum purchased by investors, why consider it at this time?

Let us examine the evidence.

First, we will look at a ratio chart comparing platinum to palladium prices. Below is a three-part chart, showing:

a. Top – platinum/palladium ratio – in other words, the number of ounces of palladium that can be purchased with one ounce of platinum.

b. Middle – the price of platinum.

c. Bottom – the price of palladium.

Take on Platinum

Note above that the ratio, which has just hit 0.50 ounces of palladium for one ounce of platinum, is now tied for the lowest value ever recorded. The only comparable value occurred during 2001, in which the ratio similarly touched the 0.50 level. These levels are shown by the blue shading.

What were the prices of each metal the last time the ratio hit this 0.50 value?

Platinum: $550/oz.

Palladium: $1,100/oz.

Next, in the lower part of the chart, notice what happened to the price of each metal after the ratio bottomed in 2001. Over the subsequent two years, palladium plummeted by 86%, falling all the way down to $150/oz by 2003.

And platinum? It soared. By the peak in 2008, it had risen to $2,280/oz, nearly a 315% gain.

And the ratio? It rose from 0.50 to over 6.00. In other words, palladium lost over 91% of its value compared to platinum in those seven years.

Quite a dramatic divergence for two commodities which are often lumped into the same category as non-monetary precious metals.

Fast Forward to Today

Moving to today, note again that the ratio has just hit that same level that it reached in 2001 when palladium began to drop and platinum soon soared.

Yet what is the prices today?

Platinum closed this week at $874/oz on the futures market, while palladium closed at $1,358.

Once again, the ratio has bottomed at just near 0.50 ounces of palladium for that single ounce of platinum.

Time to Buy Again?

While no one can predict the future perfectly, we do have nearly four decades’ worth of ratio data at our disposal, and this is only the second time in history that platinum has been so cheap compared to palladium.

Now let us perform further analysis on platinum itself.

Above we show platinum since 2011. Note how it had been in a 7-year downtrend, since the 2011 peak at $1,975 per ounce.

A clear downward channel of prices formed as sellers emerged at lower and lower intervals, shown in magenta.

In early 2018, it made an attempt to overcome this downtrend of sellers – however, it failed to sustain the break. We call this a “false breakout” in technical terms – when a market hints of being ready for a trend change, yet sellers re-emerge to drive prices lower again.

Note how it had come all the way back into a multi-decade support zone dating back to 2004 near $750 per ounce (black). This region represents strong support.

Note how in March 2019, platinum finally broke that 7-year downtrend for good. It then surged to near $920, followed by a retracement last week toward $850.

Takeaway on Platinum

From a technical basis, we find platinum in a very interesting position that is worthy of investment consideration:

  • It bottomed at $750 per ounce, a support region which dates all the way back to 2004.
  • It has broken a 7+ year downtrend of sellers.
  • The platinum/palladium ratio is at a level that has only been witnessed one other time in modern history. The last time this level was achieved, platinum surged 315% in seven years.

Does this mean platinum is set to skyrocket immediately?

Of course not.

Prices could still decline marginally, back to support in the low $800’s or upper $700’s.

Nothing is ever guaranteed in the investment world, and one should only risk capital that is within one’s risk profile.

However, the risk/reward scenario for platinum at this juncture – especially in comparison to palladium – is highly favorable.

Due to the extreme bifurcation in these two metals, substitution is likely to emerge within the next five years within the automobile industry and amongst jewelers.

Investors can attempt to profit from anticipated substitution. The downside risk is moderate, while upside potential for a multi-year timeframe is considerable.

If investors wish to make an investment in platinum, they should not do so all at once. Dollar-cost averaging over the course of several months or even several years into a high-probability bottom zone allows one to avoid the risk of a short-term decline right after an initial purchase.

For those with a multi-year time horizon and a moderate risk tolerance, the data shows investment into this metal could see significant gains over the years to come.   


CHRISTOPHER AARON
BULLION EXCHANGES MARKET ANALYST

Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third-party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

Tags:

2 Comments

  1. Pingback: iGlobal Analytics - Capital Markets

  2. Pingback: Homepage

Leave a Comment

Your email address will not be published. Required fields are marked *