The increased spread (difference in the price) between
two instruments often creates interesting opportunities. Currently gold seems
to be overvalued compared to platinum, in the terms of historical average.
Recently the difference in the price of these two precious metals reached historic
levels around $350/oz. While usually the price of platinum was higher in the
past, currently it seems that gold is outperforming his cousin big time while
this happened only once the last 25 years. This anomaly will very likely
attract many traders and this may offer us an interesting investment or trade
opportunity if we play smart. We can bet on the tightening of the spread between these two metals by a kind of Inter Market Spread Strategy. Here are some Pro`s and Con`s:
Pro`s:
- Platinum is 15 times rarer than gold
- Historically unprecedented spread between Gold and Platinum will probably attract spread traders betting on the tightening of this gap.
- Platinum`s main substitute is Palladium, which can cause a shift demand from automobile industry for Platinum (Platinum is used mostly in Automobile industry - especially in diesel vehicles. Eventual Palladium supply disruption from Russia could give boost demand for Platinum and push up the price
- Comparative advantage of Platinum vs. Gold, more in the technical view (see below)
Con`s:
- Risk of slowing global economic growth may cause further widening of the spread
- Eventual supply disruption in South Africa may cause the car industry will not shift back to platinum
- Eventual crisis in diesel car markets (for example spreading of the Volkswagen case), where Platinum is used the most in catalytic converters
- Any geopolitical risk which could cause Gold will maintain momentum over Platinum
By now you should have the a quick picture about the background. For more fundamental information about the two metals please roll lower. From
the chart below you can see how the spread between them looked like over the last
25 years. As you can see, it was most of the time in favor of Platinum. However, the recent uncertainty created by the Brexit vote and the slowing
global economy caused a strong Gold rally and Platinum is not really catching
up with it yet. Last week we closed with tighter spread than the record week
before. Even the pace of closing up the gap slowed down this week, there is a
got chance will close the week with even smaller difference.
Now let´s
take a deeper look at the fundamentals behind the two precious metals.
Platinum
Currently we estimate that Platinum is app. 15 times rarer than Gold. There are only 4
big mines in the world providing 90% of the production of Platinum.
Nowadays,
it is as precious as industrial metal, and it’s used in many industries as a chemical
substance, as a catalyst and apart from many other uses also in dental and jewellery
alloys.
Most of industrial use of Platinum however come from the
automobile industry where it`s used in catalytic converters. There is also a substitute to Platinum,
it`s Palladium (and rhodium), but in diesel cars only Platinum could be used.
Looking at the current economic slowdown in Europe, where most of the diesel
engines are used, you can get a hint why are the Platinum prices so
depressed.
The most important factor for car industry to choose between them, is their relative price. In 2001 the Palladium prices were after a huge
bull market at historic heights while Platinum was just about to pick up
momentum. Given the huge difference in prices the car industry changed the
technology toward Platinum which kick started the Platinum bull market at the same time. Similar reverse shift could have been seen during the last financial
crises when Platinum prices reached historic records. At the same time the Palladium
bull market started...
Geopolitically you need to take into consideration that the
most of worlds Platinum is produced in South Africa and most of Palladium is mined in Russia. Problems with the Russian Palladium supply will lead to an increase in demand for it`s substitutes, among them demand for Platinum and vice versa. If there is a Platinum supply disruption in South Africa, the biggest Platinum producer of the world, Palladium will rally due to the increased demand from car manufacturers.
Gold
The qualities of the yellow metal makes it probably the
most popular and best known precious metals in the world. The usage of Gold is diverse,
starting from jewelries to different range of industries. As
a dental supplement for example the Gold has been used for more than 3000
years.
Gold is heavily used in manufacturing of electric devices as it acts as a reliable and fast conductor of electricity. However silver and copper are better conductors so why to use gold...? The advantage of gold compared to its much cheaper peers is that it is not corroding hence offering better durability and stability.
For some interesting figures let`s look at the mobile phone industry. According to the World Gold Council, a single mobile device contains up to 50 milligrams of Gold. That’s a tiny amount but nearly 1 billion cell phones are produced each year...
Gold is heavily used in manufacturing of electric devices as it acts as a reliable and fast conductor of electricity. However silver and copper are better conductors so why to use gold...? The advantage of gold compared to its much cheaper peers is that it is not corroding hence offering better durability and stability.
For some interesting figures let`s look at the mobile phone industry. According to the World Gold Council, a single mobile device contains up to 50 milligrams of Gold. That’s a tiny amount but nearly 1 billion cell phones are produced each year...
For Gold is also typical seasonality when the physical
demand for the yellow metal increases especially in Asia. The two most followed
periods of the year are the Indian Wedding Season in the fall and the Chinese
New Year around January and February. In Asia, Gold is still a well trusted
asset representing social status. Therefore, in times of falling Gold prices
many families are also trying to get the yellow metal at bargain price, which
may provide certain cushion to the decline.
From technical perspective
Gold
Gold has confirmed a few weeks ago the higher low by
breaking above 1300. The yellow metal has recently broken another significant resistance
at 1350 and if it can close the week above, the break will be confirmed. The
next level with a potential 40 dollar gain is around 1400 (more accurately
(zone 1392-1433) which could be a significant hurdle for the bulls.
Platinum
There is a slightly different (or delayed) situation at the Platinum market. As Gold had already confirmed its higher low, Platinum`s
resistance zone of $1090-1100 is just tested and the bulls seem to struggle to
break out. Until this resistance is not broken (weekly close above) the higher
low cannot be considered as confirmed. However, if this will happen the next
significant resistance zone starts app 100 dollars higher (resistance zone $1190-1290).
This gives Platinum a comparative advantage vs. Gold.
Summary:
You can play this situation with two simple strategies:
1
1. Long Platinum at breakout with a stop below
former resistance expecting the white metal will catch up with the momentum of
gold. Targets $1200-$1300-$1500 per ounce by moving the stop higher each time.
2 2. Inter market spread trade: Long Platinum and
Short gold, same notional at current levels. This allows you to play on the
spread tightening hedging partially the risk of an eventual sell off in the
precious metals market by shorting gold. Getting out of the strategy when
spread reaching -$361 (you need to monitor this daily, link to spread chart). Targets spreads are $0 and $180 (just below average
spread). With a small part of your position you can try to wait as long as the
spread goes up to $500 per ounce, but to reach this it will require fundamental change in the background of the Platinum market.
I hope this helps. If you have any question regarding the above, please do not hesitate to contact us
Watch your risk and be consistent !
Mr. TechMan
DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading teams view on past and current economic and capital market environment. It is not and shouldn´t been viewed as an investment advice and the creator of this material shouldn´t been hold liable for any loss resulting from action where despite this disclaimer someone would consider this material as an investment advice.
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