The Platinum/Gold Ratio is at a Critical Point

Back in January, Brian O'Flanagan wrote an interesting piece for Screwtape on the Platinum/Gold ratio. Traditionally, platinum is a more precious precious metal than gold, and its ratio has reflected that: apart from on a couple of very brief occasions, it has always been higher than 1:1.

Until the latter part of 2011 that is, when platinum plunged from its highs of $1870/oz to a heart-stopping $1360/oz (27%). Although gold suffered its own drop ($1900 to $1540/oz), it was 'just' 19% - ergo the PLAT:GOLD ratio fell to below parity for essentially the first (sustained) time in modern memory. This is visually represented in these two charts:

Thus, between August 2011 and March this year, gold was more precious than platinum. This month, however, that changed and the ratio is flirting with resistance at 1:1. At the time of writing, thanks to gold's Friday surge, platinum is again cheaper than gold, but not by much. So what does this mean for the two metals, and how can we take advantage of it?

Firstly, a couple of obvious points. The parity line (1:1) appears to be strong support/resistance. This is no coincidence: as platinum has almost always been more expensive than gold, it's a brave trader who decides to push through this barrier on the way down. Note the large black candlestick spiking up (far left, chart #1) as this line is hit: clearly there were those who thought that the heresy of second-place platinum could not be countenanced. Once it was breached, however, further falls were swift, as the heresy became adapted as the new faith with some gusto.

Similarly, once the line was breached, we can now expect it to serve as resistance, as both bulls and bears for this ratio try to work out whether we're in a new paradigm or whether the last six months were simply an aberration that can be quickly snuffed out.

Secondly, we can crudely place platinum bulls into the 'economy bulls' camp. In other words, because platinum is overwhelmingly used in industrial applications (catalysts, etc.; investment demand is only around 10% of production), one needs to be bullish about the wider economy, growth, and so on, in order to buy it. However, gold bulls can be (equally crudely) placed into the 'doom and gloom' camp, and expect the economy to stagnate, low interest rates to be maintained, and more money printed (resulting in inflation). The fact, therefore, that PLAT:GOLD is flirting with parity is perhaps symptomatic of broader market sentiment, which is divided between (a) 'hey, let's all jump on the stocks train' and (b) 'run for the hills'.

Or, to put it another way, no-one's got a bloody clue what's going on.

So, GOLD:PLAT is at a critical 'round-number' point (1:1). It's also, strangely, at a critical technical point. Let's go back to the chart:

The 50- and 200-dma are close to meeting, and so a resolution of the question of which metal is currently more 'valuable' cannot be far away. In other words, it's 'shit or get off the bog' time for the ratio: the 50-dma will cross the 200 and restore platinum to its 'traditional' pre-August 2011 status of being significantly more expensive than gold, or the two moving averages will meet, kiss, and move apart again, with the 50-dma going south. That would appear to be a confirmation that gold (thanks, presumably, to its investment status) is now genuinely more attractive to industrial platinum, a fact which in itself we might take as an indication of the health (or at least the perceived health) of any nascent economic recovery.

It's impossible to say for sure, but it looks like the latter scenario is more likely, given that the RSI, Slow Stochastic and MACD are all indicating further falls to come in the ratio. A retest of the 50-dma seems all-but-certain, and there seems to be enough firepower in the falling indicators to push it below this line. Conversely, a successful retest would be very bullish, and could allow the moving averages to cross in the near future.

That's the case, perhaps, for the ratio bears. However, the PLAT:GOLD bulls could well turn round and say, ah well, but what about the rising channel? OK, here you go:

I have to say, this isn't that convincing. It's not a very neat channel (I've kind of forced the lines to fit), and it's pretty short-term: less than three months. I'd be surprised if, from a technical view point, that this formation alone would allow platinum to push its ratio with gold through parity. Far sexier is platinum's nearly completed inverted head and shoulders, which you will recall has been appearing on all sorts of commodity charts of late, not least of which is that for gold (please see my article here):

Note that this is on the platinum daily chart, not on the PLAT:GOLD ratio chart (as that wouldn't make any sense at all...) It is broadly comparable with that seen for gold, silver and the CCI (again, see this article for the charts), and I can hardly argue that gold's IH&S will break north but make a case that platinum's will not. Either they both will (and so will silver's and the CCI's), or none of them will.

I'd say that the outlook for platinum investors is pretty bullish. But we're concerned here with the platinum:gold ratio, not platinum itself per se, and I would submit that the last chart, albeit a very bullish one for platinum, doesn't really provide any clues regarding the ratio. Both gold and platinum could rise (or fall) at the same rate (whether it be slowly or exponentially), and the ratio would thus remain static. So a bullish outlook for platinum does not necessarily mean anything in terms of the platinum-gold ratio.

I should mention a couple more things before concluding. First is that the account above is pretty much just technical analysis, which is only one-quarter of the factors that one needs to consider when trading/investing (the other three being sentiment, fundamentals and events). Platinum has not yet seen the recent speculative activity associated with gold or, in spades, silver, but this could change with Sprott's new Pt/Pd ETF. Platinum is also far more prone to events, given that 80% of production is located at just three sites in South Africa (imagine what the price of platinum would be today had the country been Mali rather than RSA?) These sorts of factors can quite simply blow TA out of the water, and must be borne in mind.

What we're really interested in is which metal will perform better, and therefore which is the better investment. And by extension - although I don't want to over-egg the pudding here - which of the two 'camps' ('doom and gloom', or 'yay, let's all buy auto-mobile shares') we're going to fall into.

All of the above is a long and convoluted way of saying that in the markets there often exist certain indicators, sometimes obscure and sometimes opaque, which can give clues about not just the future of the investment itself, but also about wider investment possibilities. They can also give hedging opportunities. I can't tell you which way this particular ratio is going to go - it'd be like flipping a coin at the moment - but I can tell you that once the situation is resolved (in the next month or so), we should have a whole host of indicators from which we can hopefully make more informed trading and investment decisions.