Gold, Platinum Ratio Shifts, Hints at Wider Change

Platinum prices have comfortably traded much higher than gold for the bulk of the last 20 years or so, but that relationship is starting to change and may signal a new order of value in the precious metals.

"A gold price higher than platinum is very unusual since the mid-1990s, when platinum's use in catalytic converters really took off for diesel engines," said Adrian Ash, head of research at BullionVault.com.

"Just like the under-performance of gold-mining equity in 2011, the low gold/platinum ratio points to economic weakness worldwide," he said, adding that the ratio last broke below parity during the post-Lehman Brothers slump in 2008.

Prices for the two metals have been trading fairly close to each other over the last couple of months, with gold surpassing the price of its rival a few times. That's a far cry from about five years ago, when platinum was worth about twice as much as gold.

On Thursday, investors had to spend more to buy gold than platinum. The December futures contract for gold settled with a price of $1,781.40 an ounce on the Comex division of the New York Mercantile Exchange, while October platinum finished at $1,780.60 an ounce.

Just as it did in the post-Lehman slump, the recent break below parity signals that "retained capital is choosing preservation over growth," as Ash puts it.

Traditional Worth

Platinum has usually had a wide premium above gold prices — an understandable relationship given that some consider the metal, which is around 30 times as rare as gold, to be much more precious.

Platinum Guild International, a marketing arm for the global platinum jewelry industry, regards platinum as "pure, rare, eternal" and the "most precious of metals."

"Platinum is a relatively new and scarce commodity and hence its price [is] more sensitive to fluctuations in output," said Edmond Bugos, director of mining finance at Strategic Metals Research & Capital. "It's definitely more like a commodity than gold."

Gold, on the other hand, is an asset, he said, so it's valued differently with "so much of it hoarded relative to annual mine output that its price is driven by investment demand alone."

Bugos points out that, historically, gold has traded at 80% to 100% of the platinum price. The percentage fell in the 1990s to about 44% by 2000 when gold bottomed, he said, and generally stayed in the 40% to 60% range until 2008 "when this all changed."

Investment bank Lehman Brothers filed for bankruptcy in September of 2008, in what has been seen as the catalyst for global financial crisis.

Now, gold trades at around 80% to 100% of platinum price — at the high end of the pre-1996 norm, but that's not necessarily "historically abnormal," said Bugos.

"This bull market in gold is going to break all the historical records before it is over," he said.

Understanding the Change

So what does this change in the gold and platinum ratio indicate for investors?

Economic activity is weakening when platinum prices fall below the price of gold because platinum is an industrial metal, said James Turk, founder and chairman of GoldMoney. And since gold is money, "monetary problems tend to worsen when the gold prices rise above the platinum price."

"The relative demand for these two metals drives these two different results," Turk said. But the "economy can be weakening while monetary problems worsen, which actually appears to be the case at the moment."

Under that scenario, "gold is the safer of the two metals because a flight to a safe-haven during periods of monetary turmoil is an overwhelming force, and gold is the safest haven because it does not have counterparty risk," said Turk. Read about how recent volatility in gold has dulled investor security.

But platinum's a precious metal too, and some analysts predict higher prices for the white metal, particularly amid an expected recovery in demand for the metal from Japan's auto sector.

So gold and platinum may continue their competition for a long time to come.

On Wednesday, Thomson Reuters GFMS predicted that gold would top $2,000 an ounce by the end of this year.

Platinum group metals refiner Johnson Matthey (JMAT.L - News) forecast the six-month average platinum price at $1,870 an ounce, in an industry review report released in mid-May — and said prices might even trade as high as $2,000 during that period.

The gold price will continue to outperform platinum "as long as the financial uncertainties [in the worldwide economy] are present and investors are fearful," said Terry Hanlon, president of Dillon Gage Metals.

As for how high gold prices can go, Matthew Tuttle, chief executive officer at Tuttle Wealth Management in Stamford, Conn., targets $2,200 to $2,400 an ounce by the end of next year.

However, he also sees a retracement down to $800, "probably a couple of years" after that because "parabolic moves typically will eventually pull back to where they started."

Either way, "the real story is all about gold," he said. "Platinum is an innocent bystander."