The cheap precious metal
If you clicked on this post anticipating an in-depth analysis of the platinum market, you may be disappointed, because that’s not the aim here. Nor is it to persuade you of a bullish platinum outlook. It is however a heads up for investors who are interested in gold and silver that there is another option that has not yet run up in price.
Specifically, since early 2018, gold and silver have both roughly doubled in price. Platinum hasn’t … it’s about where it was then. This means that relative to its more popular kin, platinum is about half as historically expensive. Given the dollar depreciation that has taken place since, it’s not a stretch to infer that platinum itself is down by about half.
There are reasons to suspect that is unsustainable. Readers can find the bullish case more thoroughly explored elsewhere … here we specialize in points of view that are not so elsewhere. We have commented occasionally on it though and recently made a brief observation that may indicate that a turn in platinum’s fortunes could be at hand. The comment indicates that Costco is now selling platinum … something it might be expected to do only if it perceived significant demand. This isn’t a suggestion to load up on platinum, but investors that haven’t heretofore considered making it part of their elementary commodity allocation might do so.
Gold hit new record prices today, just short of $2700 per troy ounce. Lack of confirmation from copper, silver and platinum however bears watching. On sub-weekly time frames, it’s not unheard of … in fact it’s fairly routine for one or two metals to move counter to the others one day and for the opposite to happen the next. If we don’t see follow through from copper, platinum or silver in the next couple of trading sessions, it’s a caution light for gold. If gold does continue to forge ahead on its own, it would likely indicate that gold is being driven by its monetary nature alone, signifying newly elevated concern about dollar debasement.
… aaand there we have it. Kitco shows gold having just broken through $2700.
Seeing gold continue its ascent through $2710 just now made me flash on a certain New Year’s Eve 1999. Mrs Finster and I were in our hotel room getting ready to go to our millennial New Year party. On the TV CNBC was reporting on the amazing rally in stocks capping the last hours of the twentieth century. Having become skeptical of its sustainability, we were completely out of stocks at that point, a rare extreme of positioning that we would maintain until October 1, 2002.
Is it an omen? A little voice inside always makes me suspicious when something just keeps going up. But the thinking part says likening gold in 2024 to dotcoms in 2000 is a stretch too far. Looking through a CNBC blurb just hours ago revealed not a single mention of gold. Never throw all caution to the wind, but I think there will need to be a little more excitement about gold before it dotbombs.
So while that’s unlikely any time soon, it is likely gold is near a peak relative to stocks and will then underperform stocks for a while. It has been outperforming and the stocks:gold ratio has fallen near a level where it has reversed multiple times before over the past few years.
This doesn’t say anything about gold prices in dollars – that’s a dollars:gold ratio – it just means stocks would temporarily have the stronger technical tailwind. If gold does continue to outperform stocks (VT:IAU breaks down), it signals a shift in the fundamentals that have prevailed over the past few years.
A word about silver. That we reference it less often than gold doesn’t indicate we think it unworthy of a place in an elementary commodities allocation. As I’ve noted before, its performance dynamics tend to be a cross between copper and gold. This isn’t surprising given that it has both industrial and monetary applications. Of the four metals in the Financology Model Portfolios though, it has a relatively small weight, on par with platinum. The 18:18:32:32 Portfolio for instance has 0.90% of each out of a total of 18% elementary commodities. Copper weighs in at 1.8%. Gold has by far the lion’s share of the allocation at 14.4%.
The main reason for this is correlations. Financology’s volatility studies indicate gold is uniquely diversifying to stocks, so in a portfolio with a substantial allocation to stocks, gold is king. As noted in one post, The Impermanent Portfolio, it was striking at how little additional diversification benefit any of the other elementary commodities provided. That’s peculiar to stocks, however … in a portfolio dominated by bonds, copper is the most effective diversifier.
Investing isn’t a one-size-fits-all proposition though. Silver bugs can allocate to their heart’s content so long as they’re willing to abide the volatility. A bit more in bonds than one would normally use with a comparable gold allocation might help keep it in check.
Precious metals investors may be wondering about other platinum group metals, including palladium and rhodium. I see them as niche elements rather than core portfolio assets useful for investing, but if you like ‘em, go for it. Given the difficulty of predicting the financial future, there’s a lot to be said for owning things you like. It’s a bit like art or fine wines … even if they don’t serve your investment objectives, you still own something you like.