Gold and Platinum - A New Era

The following is an extract from commentary that was posted at www.speculative-investor.com on 23rd May 2002. 

We've devoted quite a bit of space in previous commentaries to the gold/silver ratio and have concluded that gold would continue to out-perform silver until either the stock market reached a long-term bottom or the general level of commodity prices began to trend strongly higher. This conclusion was based on historical performance data and the recognition that gold has more of a monetary role than does silver.

We've also looked at the relationship between gold and platinum in the past and concluded that gold tends to out-perform platinum during those periods when the US economy is weak and/or confidence in the US$ is low. This conclusion was derived from historical performance data and also makes sense on the basis that the dominant influence on the gold price is monetary (investment) demand whereas platinum's major uses are non-monetary.

During the 1995-2000 period the US Dollar trended strongly higher and the US economy boomed, so the platinum price was naturally very strong relative to the gold price. In fact, during the final quarter of 2000 and the first quarter of 2001 the platinum price reached its highest premium (in percentage terms) to the gold price since 1972. Of course, in 1972 gold had just been de-coupled from the US$ following 38 years of having its price fixed at $35/ounce. Furthermore, as was the case during the early-1970s the pt/gold ratio has, over the past 15 months, reversed sharply lower. 

This brings us to our point. The gold price has been persistently strong over the past 6 months, but there have been several rallies lasting 6 months or longer since the secular bear market in gold began in 1980. In terms of the increase in the gold price there is certainly nothing special about the current rally. It becomes special, however, when we note the incredible gains achieved by the gold mining shares despite the modest-only increase in the bullion price. The only other period over the past 40 years when gold stocks rallied to this extent without a concurrent large increase in the gold price was during 1965-1968. As we explained in our 15th May commentary this 1965-1968 gold stock rally in the face of a flat gold price forewarned of the coming gold bull market. 

So, we have extraordinary strength in gold shares relative to the bullion price and we have what looks like a secular peak in the platinum/gold ratio. Perhaps the markets are trying to tell us something.

Below is the long-term chart of the platinum/gold ratio that we've shown in the past. One of the consequences of the gold bull market of the 1970s was that the platinum price went from being about 3-times higher than the 'fixed' gold price in 1971 to being less than 1-times the floating gold price by late 1974. Notice, on the chart, the plunge in the ratio from its 1971 peak and the similar-looking plunge in the ratio from its early-2001 peak. Also note that once downward trends in the pt/gold ratio get started they tend not to end until the ratio falls below 1.

So, what is our point? We actually have two points to make (two for the price of one). Firstly, we've said on a few occasions over the past year that we would heavily overweight gold relative to platinum, and that remains the case. In fact, unless there is a major and unexpected change we will overweight gold relative to platinum until the gold price moves above the platinum price. We will, however, still retain some exposure to the stocks of PGM producers (some of these stocks are actually beginning to look very attractive on a valuation basis compared to the gold and silver stocks). Secondly and more importantly, the similarity in the way the pt/gold ratio has behaved over the past year and the way it behaved during the early-1970s is one more shred of evidence that we have a secular trend change on our hands, one result of which will be a gold rally of historic proportions.

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