Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Stocks Bull Market Looks to Resume - 25th Apr 15
Gold And Silver - The U.S. Is A Corporation. Precious Metals Stand In The Way - 25th Apr 15
When the Nuclear Money Option Fails - 25th Apr 15
The War on Cash Special Report - 25th Apr 15
China Economic Slowdown Story - Why “Didi Dache” Is a Phrase You Need to Know - 25th Apr 15
The Trans-Pacific Partnership and the Death of the Republic - 25th Apr 15
Stock Splitting Caused the Stock Market Crash - 25th Apr 15
China Stock Market Parabolic Mania’s Global Risk - 24th Apr 15
What Will Happen to You When the U.S. Dollar Collapses? - 24th Apr 15
Why 2 of U.S. Dollar's Recent Bottoms Have 1 Thing In Common - 24th Apr 15
UK Economy Debt Timebomb Will Explode After Election - 24th Apr 15
Are Gold Stocks the Cheapest Ever? - 24th Apr 15
God, the Stock Market and Pascal's Wager - 24th Apr 15
Greedy Insurers Are in for a Nasty Surprise – Positioning You for Big Profits - 24th Apr 15
Four Things Missing From Obama’s First-Ever Energy Review - 24th Apr 15
How to Grow a Regenerative Medicine Industry - 23rd Apr 15
Stocks and Bonds Seven Year of Negative Returns; Fraudulent Promises - 23rd Apr 15
The Existential Danger To The Euro Is Elections - 23rd Apr 15
Stock Market No Clear Direction As Investors React To Quarterly Earnings Releases - 23rd Apr 15
Is China The Next United States? - 23rd Apr 15
U.S. Oil Glut: How High Can It Go? - 23rd Apr 15
Distorted Financial System Expect Deflation, Inflation And Hyperinflation - 23rd Apr 15
What McDonald’s Corporate Earnings Report Is Really Telling You - 23rd Apr 15
Gold Price Forecast to Become Priceless - 23rd Apr 15
FDIC Plots a Bank Heist Involving YOUR Accounts - 23rd Apr 15
$GOLD Price Year 2007 Again - 23rd Apr 15
Stocks Bubble - The Spread between Stock Prices and GDP is Blowing Out - 23rd Apr 15
Ukraine War - When Did We All Become Murderers? - 23rd Apr 15
Libya Crisis - EU Leaders Are Indicted for Nazi-Style Crimes against Humanity - 22nd Apr 15
Why Alternative Energy Isn’t Taking It on the Chin Despite Low Oil Prices - 22nd Apr 15
Bill Gross - German 10-Year Bunds Short of a Life Time - 22nd Apr 15
How to Profit from the Drop in the Oil Price - 22nd Apr 15
The U.S. Dollar's Move Is More Dangerous than You Think - 22nd Apr 15
Apple Watch Means Apple Will Become Worlds First $1 Trillion Stock - 22nd Apr 15
Half a Stocks Bubble Off Dead Center - 22nd Apr 15
They Said Go to College - Learning to become Debt Slaves - 22nd Apr 15
Best Cash ISA 2015/16, Instant and Fixed Savings Interest Rates, New Flexible Withdrawal / Deposit Rule - 22nd Apr 15
Unsound Banking: Why Most of the World's Banks Are Headed for Collapse - 21st Apr 15
Bitcoin Recent Low Price Volatility Might Be Deceptive - 21st Apr 15
Currency Wars Back As Russia Buys Gold - One Million Ounces in March Alone - 21st Apr 15
The Greece 'Grexit' Issue and the Problem of Free Trade - 21st Apr 15
Why Europe Lets People Drown - 21st Apr 15
Wealth Destruction for the 99.9 Percent - 21st Apr 15
SNP Publish England's Suicide Note as Pollsters Still Forecast Labour-SNP Election Disaster - 21st Apr 15
Characteristics of Extremely Over-Indebted Economies - 21st Apr 15
Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 21st Apr 15
Gold & Silver Alert: Silver Stocks’ Signal - 20th Apr 15
Now is the Time to Buy Resource Stocks, Especially Gold Equities - 20th Apr 15
DJ Transportation & Utility Averages Suggest Stocks Bull Market Is Over - 20th Apr 15
Crude Oil Price Bull Market Hope - 20th Apr 15
Stock Market Bears Get Slaughtered Despite Greece Counting Down to Grexit Financial Armageddon - 20th Apr 15
The Rise of the Paper Machines - 20th Apr 15
Gold and Silver Inflection Point - 20th Apr 15
SP500: A Butcher's Stock Market (Chop Chop Chop) - 20th Apr 15
Are Stock Market Bears Slowly Gaining Control? - 20th Apr 15
Sugar Commodity Price Bear Rally - 19th Apr 15
Avoid the Spread of the Stock Market "China Syndrome" - 19th Apr 15
Stock Market Going Nowhere Fast - 19th Apr 15
An Easy Way to Profit From the Two Biggest Trends in the Stock Market - 19th Apr 15
No Scripture Is Divine, Authentic and Beyond the Creation of the Human Brain - 19th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Historic Bubble

Platinum and Gold Price Trend Relationship Analysis

Commodities / Platinum Jul 30, 2010 - 11:08 AM GMT

By: Zeal_LLC

Commodities

Diamond Rated - Best Financial Markets Analysis ArticlePlatinum and gold, how much of a relationship do these metals really have?  Gold has been the talk of the town lately, a growingly-popular safe haven in these wild economic times.  But platinum, one hardly hears of this metal.  Guys like me who have wives with high-end jewelry taste certainly know about platinum, and car buffs are familiar with its use in catalytic converters.  But with the average investor knowing very little about this metal, is it even on the same playing field as gold?


Platinum and gold are definitely on the same playing field in that they are both commodities in the midst of powerful secular bull markets undergirded by strong long-term fundamentals.  Platinum’s bull gathered momentum around the same time as gold’s, in 2001, and had seen a 448% gain to its 2008 high.

Categorically these metals have a lot in common in that they are both very precious.  In fact, measured by price platinum is more precious than gold.  With it getting as high as $2273 in March 2008, and currently at about the $1500 level, it definitely costs more to buy an ounce.  And with platinum’s annual production volume at about 6.0m ounces, about 8% that of gold’s, it is more rare.

Also like gold, platinum has many different applications.  Autocatalysts and jewelry are by far the largest demand components.  But there are a whole slew of other uses, from turbine blades to medical sensors.  Platinum even has an investment side to it via a growing market for coins, bars, and the new asset-backed ETFs.

But from a trading perspective, do platinum traders really tune in to the actions of the bellwether precious metal?  The following charts will paint pictures of how these two metals really do relate.  And as you’ll find, there are indeed very compelling technical relationships.

In this first chart is platinum and gold’s secular picture, and the similarities sure are visually striking.  As you can see, these metals had a very tight correlation prior to the infamous stock panic of 2008.  When gold rallied, platinum was right there with it.  And when gold pulled back, platinum followed suit.  Not only is this correlation visually apparent, but the math concurs.  From 2002 to August 2008 platinum had an amazing correlation r-square of 95% with gold!

This means 95% of the daily behavior of platinum’s price could be explained by the daily movement of gold.  An incredibly tight correlation!  Despite platinum’s own fundamental merits, this long-term correlation shows gold to be a very strong technical driver of platinum.  But thanks to the stock panic, this correlation came to a screeching halt.

In those wretched late-2008 months when every asset was being sold off with reckless abandon, platinum set a course for ruin and was oblivious to what was happening with gold.  During the panic the only correlation was the fact that both metals were down.  On a day-to-day basis, an r-square of 22% showed these metals were dancing to different tunes.

From their all-time highs in the beginning of the year, platinum and gold plummeted 66% and 29% respectively to their 2008 panic lows.  Platinum was simply obliterated, falling to prices not seen since 2003.  But these outsized losses compared to gold were not a complete surprise considering the nature of platinum’s market.

Since platinum trades in such a tiny market compared to most other commodities, it doesn’t take much outsized buying or selling pressure to quickly move its price.  And this allows sentiment to play a much larger role.  With such an incredible state of fear during the panic, traders aggressively unwound their platinum positions, thus resulting in a high-velocity decline.

Finally after traders realized the world wasn’t coming to an end in late 2008, platinum found its panic bottom and quickly entered into recovery mode.  And it would have its work cut out for it to recover from such catastrophic losses.  Gold of course found its bottom around this same time, and platinum would look back to the yellow metal to set its course.  From the panic bottom to current, these two metals have sported a correlation r-square of 85%.

But as is glaringly obvious in the chart above, gold has easily recovered its panic losses and platinum has not.  In September 2009 gold achieved a new all-time record high, and has been trending higher ever since.  Platinum has had an excellent recovery of its own, more than doubling so far off its panic lows.  But it is nowhere near its highs from a couple years ago.

Platinum bulls are of course very concerned that this metal has not retested its highs while gold has blown through its own.  But I believe this is easily explainable when you consider the utility of these metals.  And it is simple economics that tells the precious-metals story that has played out in recent years.

With continued supply strain on the mining fronts for both platinum and gold, it is the activities on the demand side of the economic scale that have of course been the big price drivers.  And as anyone with a pulse is fully aware, the current global recession has radically altered the demand for virtually all goods and services.

During recessionary times it is especially likely for demand to fade in such areas as industrials.  When consumption and development slows, manufacturers produce fewer goods.  And these same manufacturers tend to drain their inventories during such times, lowering demand even farther.  So naturally those metals with higher industrial exposure are more likely to experience economic strain.  And this strain typically results in decelerating demand growth and/or falling prices.

Gold has minimal industrial exposure, an average of only about 10% of its demand in recent years, with investment and jewelry by far the largest demand components.  So with minimal economic pressure on the industrial side, a structural supply deficit, and growing mainstream exposure on the investment front, this metal easily warrants the price activity seen thus far.

When you consider platinum’s sensitivity to the economy, this metal doesn’t feel quite as precious.  Over the last 5 years an average of 66% of platinum’s annual usage has come from the industrial side of things.  And with the largest industrial-type demand coming from the automotive industry, this recession has no doubt strained platinum.  Much lower global vehicle production has led to 2009 autocatalyst demand being nearly half what it was in 2007 according to Johnson Matthey (JM).

This weak industrial demand put the platinum market into a surplus in 2009.  And if it wasn’t for huge jewelry demand out of China (2.0m ounces), 2009’s surplus would have been much larger than the 285k ounces JM estimated.  So did platinum’s price warrant a reversion to its highs like gold?  Absolutely not!

But just because platinum’s interim fundamentals are struggling along with the economy, it doesn’t mean its post-panic gains to date are a fluke and that long-term fundamentals have been compromised.  According to numbers provided by JM, since 1999 platinum has run a 2.1m-ounce supply deficit, even after the 2009 surplus.  Platinum is also in the midst of a 3-year-running production decline on the mining front.

If investment (helped by the emergence of asset-backed ETFs) and jewelry (China is just starting to get a taste for this metal) demand continues to strengthen while the economy continues its turnaround, platinum will quickly revert to a deficit environment.  And this will of course send prices much higher.

So where can we expect platinum prices to go once its interim fundamentals stop holding it back?  Let’s again look to gold for some guidance.  And in the platinum/gold ratio we see a technical relationship that goes beyond correlation.  The PGR divides platinum’s daily closing price by gold’s daily closing price.  And the resulting data charted over time reveals a fascinating picture.

The PGR line in blue does a fine job expressing platinum’s relationship with gold in a single data series, showing where platinum tends to trade relative to gold over time.  When the PGR is rising, platinum is either outperforming gold or declining at a slower pace.  And when the PGR is falling, gold is either outperforming platinum or declining at a slower pace.  The resulting number is how many ounces of gold it takes to be equal in value to one ounce of platinum at any point in time.

As you can see in this chart, up until the panic platinum had a well-defined secular relationship with gold.  For 6 years the PGR resided within a horizontal trading range, from about 1.75x on the low side to 2.10x on the high side.  When platinum traders got excited the PGR would approach the high side of this range, on two occurrences vaulting the PGR well above resistance.  And when traders showed fear the PGR would slide towards support, with 1.75x holding very strong.  Over this 6-year span the PGR averaged 1.95x.  This means that during the lion’s share of platinum’s bull leading up to the panic, it would cost two ounces of gold to buy one ounce of platinum.

Towards the end of these 6 years of normalcy, in the first half of 2008, the precious metals would see huge rallies, and platinum traders really got excited.  In this tiny market it doesn’t take much differential buying pressure to bid this metal up real fast.  And with a PGR above 2.30x, platinum was well-outperforming gold.

But right away in the second half of 2008 platinum followed the entire commodities complex into a much-needed correction.  And just as easily as platinum outperformed gold on the upside, as you can see by the PGR’s sharp decline platinum’s losses outpaced gold’s on the downside.  And with the panic accelerating this correction, buyers of platinum became difficult to find.

By early September the PGR had decisively knifed through support, and continued to plunge until it bottomed at 0.97 in December.  With platinum’s loss at over twice that of gold’s (-66% versus -29%), it is easy to see how the PGR could be sliced in half.  But even though this metal had more of a fundamental reason to fall harder than gold, it was radically oversold.  And at this bottom traders could hardly believe platinum was trading at par with gold!

A PGR at or below 1.00 would have seemed simply unheard of just a few months before it actually happened.  Platinum trading at or under the price of gold has been an extremely rare occurrence in recent decades.  In fact, the last time it actually happened was 12 years prior, in late 1996.  And this was only for a very brief spell.  Platinum had not decisively been below gold for nearly 25 years.  Over these last 25 years less than 2% of trading days had seen platinum lower than gold, each instance only marginally.

This super-low PGR of 0.97 had not been seen since January 1992, showing just how ridiculously oversold platinum was.  But it didn’t take long for traders to recognize this anomaly, and going into 2009 platinum mounted a powerful rally.  To its high in April platinum gained 128%, well outpacing gold’s 58% gain over this period.  And as you can see, this outsized gain has led to an uptrending PGR over the last year and a half or so.

But even with the PGR heading in the right direction, it still has a long way to go before it gets back to its pre-panic secular trading range.  Just to get to the 6-year average platinum would need to climb to about $2300 at today’s gold price, which would be a new all-time high.  And of course if gold rises from today’s levels, platinum’s price would need to be even higher in order to return to a 1.95x PGR.

So what does this still-low PGR, well under 1.50x, tell us about platinum’s future?  Well if the PGR returns to normalcy, platinum must continue to outperform gold on balance.  And I do believe this is possible considering platinum’s speculative nature, which historically shows this metal having positive leverage to gold when traders get excited.

But in order for this to happen platinum needs fundamental support.  And based on what we know about the state of the platinum market, this support may not be too far away.  The fundamentals are currently falling back in line, and it won’t take much of a demand boost for this metal’s balance to revert back to a deficit.

If this happens the PGR should continue to be a reliable tool even in this post-panic environment.  In isolation the PGR means nothing, but we can’t discount 6 years’ worth of such a telling relationship between platinum and gold.  Over such a long span a lot of random noise is filtered out, which makes it more likely that this relationship actually has underlying fundamental support.

Now does this mean the PGR deserves to be in that pre-panic range today?  Probably not.  It will take time for platinum to recover from this recession.  But you know what, more and more cars will be built, platinum jewelry demand still has a lot of upside, and investment in this precious metal is just getting rolling.  The PGR’s return to normalcy won’t take much time once platinum traders get excited again.

And platinum traders won’t be the only ones profiting from this metal’s resurgence.  The miners pulling this metal from the ground are in line for huge profits as its price continues to rise.  In our acclaimed weekly and monthly newsletters we recently recommended an elite platinum stock that will greatly benefit as the PGR continues its grind upwards.  Subscribe today to get this pick and other high-potential commodities-stocks picks that are well-positioned to leverage the ongoing commodities bulls.

The bottom line is platinum and gold have a relationship that goes beyond the preciousness of these metals.  And while platinum will ultimately live and die by its own fundamental merits, what happens in the gold markets has shown to color this metal’s sentiment, and thus price.  Gold is the bellwether precious metal, so it will naturally have an influence on its peer group.

This influence on the upside usually leads to platinum outperforming gold.  And this is exactly what’s played out since the panic bottom.  But as the PGR reveals, platinum still has a lot of catching up to do if it is to return to its pre-panic secular trading range.  If the PGR continues to trend higher, which it should based on platinum’s bullish secular outlook, much higher platinum prices are in store.

By Scott Wright

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research as well as provides in-depth market analysis and commentary. Please consider joining us each month at … www.zealllc.com/subscribe.htm

Thoughts, comments, or flames? Fire away at scottq@zealllc.com . Depending on the volume of feedback I may not have time to respond personally, but I will read all messages. Thanks!

Copyright 2000 - 2010 Zeal Research ( www.ZealLLC.com )

Zeal_LLC Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014