Is Gold the New Platinum?

(January 21, 2013)

By Marcus Holland

Category: Investment, Gold, Mining

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January 21, 2013 (Investorideas.com Mining stocks newswire) It's a brave, new world in the commodities sector. Nothing demonstrates that more than the reversal in the historic positions of gold and platinum in pricing. Traditionally, platinum has been about $200 to $400 more an ounce than gold. But in trading since September 2011, an ounce of gold has been selling for more than an ounce of platinum.

As the chart below shows, the exchange traded funds for gold, SPDR Gold Shares (NYSE: GLD), and platinum, ETFS Physical Platinum Shares (NASDAQ: PPLT) have been moving in a relatively similar pattern. That has not always been the case, however. Even greater market forces have now displaced the historic factors that used to result in the pricing and trading disparity.

Unlike gold, platinum has significant industrial applications. Its greatest use is in automobile catalytic converters. The unique qualities of platinum are ideal for cleansing the emissions from motor vehicles.

Due to the tremendous economic growth of the 2000s before The Great Recession, platinum was selling for much more an ounce than gold. In the summer of 2008, platinum was going for $2270 an ounce while gold was well under $1000. With the global economic boom, motor vehicle production soared as consumer demand in China and other countries was finally unleashed. As the world's economies were strong, by contrast, there was little need for gold in its role as a traditional safe haven asset when fiat currencies are perceived to be risky.

But that changed as a result of The Great Recession and its aftermath. As the chart below reveals, gold and platinum have traded in an obvious co-relation in market action since last year. That should not be the case: platinum surges when economies are strong, gold soars when economies are weak. An inverse trading relationship should still be the case. Individuals that are interested in learning commodities trading should be aware of this.

But Platinum has jumped in 2013 due to disruptions at the facilities of Anglo American Platinum Ltd (PINK: AGPPY) in South Africa, the world's biggest producer. Anglo American Platinum delivers about 40% of the world's platinum. There is already a platinum shortage in the world. Analysts are projecting higher automobile production, which will exacerbate that condition. The basic fundamental of supply and demand should logically dictate here that the price of platinum should be much higher than the price of gold. But the chart below shows that is clearly not happening.

Platinum's scarcity, which should make it much more valuable, is mitigating against the price climbing to be hundreds of dollars more than gold an ounce, as has historically been the case. There is a demand for physical gold as an investment by central bankers, institutions, and individual investors. That market just does not exist for the shiny metal due to the limited depth in its market as a financial instrument.

This is easily seen in that the market capitalization for the GLD is around $73 billion with average daily volume of around 9.50 million shares. For the PPLT, the market cap is less than $1 billion with about 60, 000 shares traded daily. As an investment vehicle, the PPLT is not in the same league with the GLD.

Much of the demand for many commodities is now emanating from speculators. In testimony before Congress in April 2010, Rex Tillerson, the Chief Executive Officer of Exxon Mobil (NYSE: XOM), stated that about oil was selling for about 50% a barrel due to speculators driving up the price. As a result of this new dynamic due to the massive amounts of liquidity pumped into the world's financial markets by global central bankers, gold could now be the new platinum as the precious metal that trades higher than the other commodities in the sector for no other reason than demand by speculators.

Marcus Holland writes for FinancialTrading.com, a website that provides trading news, analysis and education.

He can be contacted at Marcus@financialtrading.com

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