In recent months there has been a near paradigm shift in the precious metals market that goes against basic market analysis of supply and demand. I’m referring to the recent change in which gold price became higher than the price of platinum. This shift occurred during October 2011 and since then has proceeded with no clear end in sight.
Currently, gold price is near $1,664 per ounce, and platinum price is at $1,530 per ounce, i.e. gold is nearly 8.7% more expansive than platinum.
The chart above presents the development of gold and platinum during 2011 and 2012 up to date. The chart shows platinum more expansive than gold during most of the year ; this makes sense because platinum is much less common than gold. According to several sources the worldwide supply for platinum reached in 2010 188.5 tonnes, while the global gold supply was 4,162 tonnes.
Since both metals are linked for being precious metals, it’s no surprise that their linear correlation between their prices was strong and positive. The chart below shows the moving linear correlation between gold and platinum (daily percent changes) during 2011 and 2012.
The chart clearly shows very strong and positive correlation during most of the year. This means that as gold price rises, platinum price also increases and vice versa.
But in this chart there is a clue for the shift in the ratio between gold and platinum: during July/August the linear correlation changed direction and sharply fell to -0.5, i.e. a strong negative correlation between gold price and platinum price. This change came during the sharp rally of precious metals, when the uncertainty vis-à-vis the U.S. economy soared; this was stem, in part, due to the debate over raising the debt ceiling, and the announcement of S&P to downgrade U.S.’s credit rating. During that time when gold and silver soared, platinum didn’t react to this news in the same way and only slightly increased. After that, the strong correlation between gold and platinum got back on track, but gold price was much higher now.
It should be noted that gold is not only a precious metal with physical demand, but also an investment for dire times; on the other hand, platinum is more considered as an industrial metal, as its main demand comes from auto-catalyst makers; therefore in economic prosperity platinum thrives, while in economic slowdown and instability gold price tends to rise.
Will this situation in which gold is more expansive than platinum continue? For the time being the answer seems to be yes, however once (and if ) the gold bubble will burst (I speculate around late 2014 when the Fed will raise interest rates ), we should see a reverse in this direction and gold will become cheaper than platinum as it once was.
For further reading:
- Weekly Outlook for 23-27 January
- Gold and Silver Prices Weekly Outlook for January 23-27
- Gold and Silver Prices Outlook for January 2012
About the Author: Lior Cohen, M.A in Economics, a commodities analyst and blogger at Trading NRG.
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