This Rare Precious Metal Could Easily Gain 39%

Right now, there's a precious metal trading at bargain levels. In fact, it would need to gain 64% just to get back to its historical valuation.

I know this sounds strange, but let me explain.

Precious metals' prices usually trade at historical ratios against each other. For example, the price of gold normally trades at 33 times the price of silver. If the ratio gets much higher than that, it signals that silver is cheap relative to gold. That's what happened in 2003 when the ratio hit 80. Silver shot up 485% and outperformed gold by 185% over the next eight years.

This kind of ratio analysis has worked for me in the past. A few weeks ago, it helped me spot that junior gold miners were undervalued relative to gold just before they exploded and delivered double-digit gains in less than three weeks.

There's a similar opportunity in platinum today.

The metal usually trades at a 64% premium to the price of gold. Right now, it's trading below the price of gold. This price inversion usually leads to gains in platinum.

There's no reason platinum should trade at a discount to gold. According to Nathan Slaughter, StreetAuthority's commodities expert, platinum is about 30 times rarer than gold and annual production is tiny compared with that of gold. It's also vital in the production of cars, so demand is not going away.

That's why ETFS Physical Platinum Shares (PPLT) looks like a no-brainer trade right now. And aside from being cheap, the 26-week rate of change (ROC) is giving a buy signal. This indicator measures price acceleration, and shares are accelerating up right now.

ROC, the purple line at the bottom of the graph, looks like it is set to turn positive and break above its upper Bollinger Band... a very bullish sign. There have only been three signals like this in the last twelve years, and each one was a winner. The last signal delivered a 22% winner in 2009. The other two trades gained 7% and 45% in 2000.

Using Fibonacci retracement levels, I've calculate a price target of $223 (1.618 x the downward move) -- a gain of 39% from recent prices. But first, prices need to break above $189, a short-term resistance level. Once prices are above $189, a trailing stop about 9% below that level should capture gains while the uptrend is intact. Until prices break above $189, traders can use an initial stop of $152, a short-term support level.

Once again, there are no changes in the 26-week ROC strategy, and we'll hold iShares Lehman 7-10 Year Treasury (IEF), iShares Barclays 20+ Year Treasury Bonds (TLT), and SPDR Gold Shares (GLD) for at least one more week.

Michael J. Carr