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Platinum Plays Catch-Up But It Has A Long Way To Go

Summary

The worst performing precious metal.

Platinum has been “cheap” against gold since 2014.

The rarest precious metal got even cheaper starting in September 2017.

A spike down and ugly two weeks in December.

The beginning of a long-overdue comeback.

Platinum is the rarest precious metal when compared to the other metals that trade on futures exchanges. While gold, silver, and palladium are all precious, platinum has characteristics that have historically made it the most precious of all metals. The nickname, “rich man’s gold” did not come from thin air. Platinum has the highest production cost as it occurs in the deepest recesses of the crust of the earth. Therefore, when it comes to primary production, platinum is the most expensive metal to extract. Platinum has a myriad of industrial applications as it is the densest metal of the four, and has the highest melting and boiling point. Additionally, like palladium, any significant production of platinum occurs in only two countries, South Africa and Russia.

In the early 1990s, I developed a particular affinity for platinum as I was the head precious metals trader at a large international investment bank.

I had the good fortune to develop a close relationship with the Russian entity responsible for exporting platinum group metals around the world. Almazjuvilirexport became my partner as we established a joint venture company with employees from both Salomon Brothers and Almaz sitting together on the Salomon Brothers trading floor and marketing the metals produced in Siberia as a byproduct of nickel output to industrial users in the United States and around the world. During those days, platinum typically traded at a premium to gold and palladium. However, over recent months and years, the price of platinum has been under pressure and has been a laggard in the precious metals sector.

The worst performing precious metal

Platinum received a scarlet letter from investors back in 2008. Many hedge funds and other large pools of capital piled into the platinum market as it exploded from under $1000 per ounce in 2006.Source; CQG

As the monthly chart highlights, platinum traded below $1000 per ounce in January and February 2006 and then took off on an incredible bullish journey that took the price of an all-time pinnacle at $2308.80 in March 2008. Platinum took the stairs up to its record high, and when it turned lower, it took an elevator shaft down to the lowest price since 2004. From March through December 2008, platinum fell by $1547 to a low of $761.80 per ounce. The platinum market toasted and roasted investors, speculators, and traders over that nine-month period which likely resulted in many pledges to never look at or trade the precious metal again.

Platinum recovered to $1918.50 per ounce in 2011, but since then it has been all downhill for the rare precious metals. In 2014, platinum shed its nickname a “rich man’s gold” as that is the last time it traded at a premium to the yellow metal.

Platinum has been “cheap” against gold since 2014

I only refer to the prices of commodities as “cheap” or “expensive” if I can compare the price histories of one raw material to another that can serve as a substitute. Gold and platinum are both precious metals. They are both ornamental as jewelry often contain one, the other, or both metals. They are both excellent conductors of electricity and have density and resistance to heat that makes them suitable for use in a myriad of industrial applications. Therefore, platinum and gold are interchangeable at times. Until the price carnage that occurred in the platinum market in 2008, the metal commanded typically commanded a premium to the price of gold. From 1974 through 2008, the price differential between the two metals ranged from a discount of around $121 to a premium of around $1150 for platinum over gold. During that period, anytime platinum’s price fell below gold it would reverse and move back to a premium.Source: CQG

As the quarterly chart of the price of NYMEX platinum minus COMEX gold futures shows since the 2008 high platinum has lost value against gold and it declined to a record low of an over $370 discount to the yellow metal in 2017. The last time platinum traded at a higher price than gold was in 2014, so on a long-term historical basis, platinum is cheap compared to the price of gold, and it has been cheap for over three years.

The rarest precious metal got even cheaper starting in September 2017

When I put together the joint venture company with the Russians in 1990 the price of platinum was around the $400 per ounce level and palladium was under $100. At one-quarter the price of platinum, the economics of using palladium for industrial applications was a no-brainer for consumers. While platinum has a higher resistance to heat and density, consumers became addicted to palladium when it came to manufactured products such as automobile catalytic converters as well as many others. In 2001, a shortage of palladium developed and the metal traded to over a $300 premium to platinum. The premium lasted from late 1999 through late 2001. However, it quickly reversed, and platinum became more the expensive metal once again. While some users switched from palladium to platinum, the economics deteriorated. From 2003 through 2014, platinum was more than $500 per ounce above the price of palladium, so industry continued to use the less expensive metal for industrial requirements.Source: CQG

As the quarterly chart shows in September 2017, platinum once again slid to a discount to the price of palladium, and as over January 15, it was trading at over $120 below the price of palladium. Therefore, at the end of 2017 platinum was not only cheap when compared to gold, but it was also cheap compared to palladium. The dog of the precious metals sector developed a severe case of fleas as it underperformed all metals in the sector.

A spike down and ugly two weeks in December

Bear markets typically come to an end when a price spike to the downside occurs, and demand at a low price creates a bottom.Source: CQG

As the weekly chart of NYMEX platinum futures displays, that spike may have come in December 2017. While gold and silver were falling, platinum declined to a low of $872.40 per ounce, its lowest level since February 2016. Platinum fell further than both gold and silver, while palladium was flirting with its all-time high at $1090 dating back to 2001.

The beginning of a long-overdue comeback

On the first day of 2018, palladium rose above technical resistance at its record high at $1090 per ounce. Since then, palladium has continued to move to the upside, finding its most recent peak at $1133 on January 16. Meanwhile, gold traded to $1345 on the same day, $109 per ounce above its mid-December low. When it comes to platinum, the rare precious metal has rallied for five straight weeks, reaching a high of $1012.90 per ounce on the April futures contract on January 17, almost $136 above its December low and more on both a percentage and nominal basis than gold.

Every dog has its day, and right now platinum looks like it is heading for a test of technical resistance at $1026.50, the early September 2017 high. A move above that level would break the pattern of lower highs and could put the volatile precious metal in a position to test its 2016 peak at $1199.50 per ounce. Even though platinum has rallied more than gold, it remains at around a $325 discount to the yellow metal, and at over $105 per ounce below palladium. On a historical basis, even though platinum is well off its lows, it remains cheap compared to both gold and palladium.

All precious metals have moved higher since the middle of December, and palladium is trading in uncharted waters at its all-time peak. Industrial users of platinum group metals are likely to use more platinum in 2018 so long as the price differential remains intact. Every dog has its day, and so far, this year platinum looks like it had a sufficient flea bath. Time will tell if platinum can continue to rise and become the top dog in the precious metals sector once again. Of the four metals that trade on the NYMEX and COMEX futures markets, platinum is the only one that holds the distinction of trading above the $2000 per ounce level.Source: Barchart

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