Gold and Platinum have a special relationship, the so-called “platinum:gold ratio.” When the ratio is high, it means platinum is more expensive than gold. If its low, platinum is cheaper than gold.
Historically, platinum trades higher than gold. It has greater supply scarcity, higher production costs and broader demand factors than the more famous yellow metal, so it has a strong tendency to usually be the more expensive of the two metals.
What is the Ratio Telling Us Today
But right now, the ratio is reversed, gold is more expensive, and that means platinum is presenting an extraordinary incentive to precious metal investors to favour platinum over gold.
The chart above perfectly illustrates the special relationship between platinum and gold and why time is running out to book maximum upside from this situation.
The ratio traded at 0.745 in January 2016, its deepest discount to gold since 1982. Since then, it has bounced back and the ratio currently comes in the 0.76:1, meaning one ounce of platinum sells for 76% of what an one ounce of gold sells for. As you can see in the chart, the platinum:gold ratio gets drawn back to price equilibrium “1.0”, meaning platinum is expected to go from its current price to the same price as gold.
Let’s look at this another way example to illustrate the potential profit opportunity. Below are the latest closing spot metal prices.
You buy 10 ounces of platinum now (10 x $979 = $9,790), and sell when the platinum:gold ratio is at price equilibrium (10 x $1,285 = $12,850). That’s a return of 24%!
Alternatively, if you were to hold until the ratio had risen from 0.76 to 1.2, around the historical average, you would be selling platinum at $1,542. The 10 ounces you bought are now worth $15,420. That’s a return of 37%.
We are not advocating trading out of gold for platinum. Gold’s just entered a bull market after 5 years of declines, and there’s too much financial repression and uncertainty to envision gold going lower. However for those who accumulated positions in gold and hold little or no platinum, now may be the opportune time to buy platinum.