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Buy Platinum or Sell Gold?

Is the Gold-to-Platinum Ratio Relevant?

Written by Geoffrey Pike
Posted October 21, 2015

gtpratioGold and silver investors will often look at the gold-to-silver ratio, which is nothing more than a comparison in prices. Some investors will use the ratio to determine which metal is more overvalued or undervalued.

While the ratio is often used to determine buying and selling – typically buying the metal that is supposedly undervalued and selling the metal that is overvalued – there is nothing magical about the ratio. Past performance does not indicate future results.

In this sense, there is no undervaluation or overvaluation. It is the price each metal is trading for in the open market. But more often than not, the ratio will revert back closer to the mean.

The gold-to-platinum ratio gets far less attention. Gold and silver have a long history of being used as a form of money. Platinum does not. Gold and silver are considered hedges against inflation. Platinum is used as an investment, but far less so.

While gold and silver are used for jewelry and some industrial uses, platinum is far more of an industrial metal. It is used for catalytic converters in cars and dentistry equipment, among other things.

Still, platinum is a metal that cannot be produced with a printing press or a computer screen, as is done with the U.S. dollar and other fiat currencies. Therefore, platinum is something of an inflation hedge. But it is more responsive to economic conditions and demand for the metal for industrial uses.

The price of platinum has already been down, especially over the last year. However, it got even worse when the Volkswagen story became headline news. Platinum is heavily used in diesel cars to help reduce emissions. If the Volkswagen story impacts the sales of diesel cars – which it likely will – then there could be reduced demand for platinum.

The price of platinum went down about 10 percent in September with the news. This added on to the decline that had already taken place in 2015.

Gold-to-Platinum Ratio Hits a High

On October 2, the price of platinum went below $900 per ounce. On that day, the gold-to-platinum ratio reached a record of 1.26. In other words, for every dollar needed to buy a certain amount of platinum, you would need $1.26 to buy the same weight of gold.

In the past, platinum typically traded higher than gold. If you are a “platinum” member of a club, it is usually considered better than a “gold” member. The same can be said for credit cards.

But the reality these days is that gold is fetching a hire price than platinum. Let’s consider this in the context of our current conditions though.

Metals have generally been down over the last few years. Silver has taken a much bigger hit than gold. This is typical, as silver is usually more volatile than gold. In a bull market, silver will usually perform better than gold.

The lower platinum price could also be another signal of a general downturn in the global economy. Economic growth is weak or non-existent in Western Europe and Japan. And you can now add China to the list, which is a major industrial player. It is no surprise that there would be weaker demand for industrial metals.

We also have to consider that central banks use gold as a form of reserves. Over the last several years, central banks have actually been net buyers of gold. China has been adding to its gold reserves. This helps put a floor on the price of gold. It is an advantage for gold over platinum, silver, and other metals. It is only a disadvantage when central banks are selling gold.

While the price of platinum has bounced off its early October lows, it is still trading relatively low compared to gold. We don’t know what will happen with Volkswagen and diesel engines in general yet, but we have to figure that much of this is already built into the market price of platinum.

The price of platinum briefly reached over $2,200 per ounce in early 2008. It is now just over $1,000 per ounce – less than half of its all-time high.

There is no magical gold-to-platinum ratio that has to exist. Maybe gold will continue to trade higher than platinum forever. But chances are, at some point, the platinum price will once again overtake the gold price. I think the only exception to this is if the world turns back to gold as a common form of money again, or at least some major central banks use gold to back their currencies.

If things get worse in China (which they probably will) and we see a downturn in the U.S. economy, platinum may still have more of a downside because of its industrial uses. Still, if this happens, we will likely see more central bank inflation, which will ultimately help the price of platinum, at least in nominal terms.

If you are using the ratio as any kind of guide, it is telling you to sell gold and buy platinum. However, you should always keep a core holding of gold in your portfolio.

My recommendation is to hold onto your gold and gold-related investments. It is there for insurance if nothing else. But if you don’t own any platinum, it might be a good time to dip your toe in the water. If we hit a bigger global downturn and the price of platinum goes down further, you can always pick up some more. We will likely see platinum overtake gold again in the future unless the world comes to its senses and starts using gold again as money.

If interested, you can buy platinum coins or invest in the exchange-traded fund (symbol: PPLT).

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