Platinum
Financology has been a fan of platinum since inception. I’ve been a fan since sometime in the last century. The advent of platinum ETFs has made investing in this lustrous white metal – included in some of Financology’s more sophisticated model portfolios – easy, but this “white gold” has not kept up with its famous yellow cousin. Platinum has been dead money for twenty years, in dollar terms, a tough accomplishment given the depreciation of the dollar over that interval.
This has left platinum extraordinarily cheap. For years, ounce for ounce, platinum had traded at a substantial premium to gold, reflected in such cultural artifacts as “platinum” awards (eg records, medals, etc) being higher honors than their “gold” peers. But platinum has since fallen behind, as it more recently required only a third ounce of gold to buy a full ounce of platinum. Here is a chart of platinum in terms of dollars, followed by a chart of platinum in terms of gold. In these natural logarithmic charts, 0=ln(1) … so the horizontal zero level on the second chart corresponds to 1 ounce of platinum being at parity with 1 ounce of gold.
Still more recently, however, platinum has been coming back to life. Silver bulls often point to silver’s cheapness in terms of gold as a key tenet of the bullish case. To the extent that’s bullish for silver, it’s even more bullish for platinum … platinum is even cheaper. Our model portfolios however are non-partisan; they include platinum at parity with silver.
So platinum is up 7% since this post. Up 24% in the last three months. In the same three months, copper is up 3%, gold 14%, and silver 11%.
Stocks are up 9%. What’s kicking in the platinum afterburners? I haven’t found a convincing fundamental explanation for its outperformance. The most likely explanation is that it became unsustainably cheap. But it’s been cheap for a long time, so it’s more complicated than that. Better to say it stayed cheap while other things got more expensive. Now it’s doing some catching up.
What’s next is where it gets difficult. It ‘s plainly short term overbought, a circumstance that’s often followed by a selloff. At the same time, people who know more about it than I do caution against aggressively positioning for a selloff via shorting. Playing with white-hot white metal could get you your fingers burned. For most of us, whether platinum is a buy or sell depends on how much we have now; whether it’s less or more than our long term target. It’s still relatively cheap compared to many other assets, including its elementary commodity peers, but while that favors long term returns, it tells us little about the short term. Those who are considering establishing or raising a platinum allocation might well do so incrementally.
For technical analysis buffs, here’s a current treatment:
Gold Forecast: White Metals: The Awakening Is Here
A few comments on mining stocks. Since the days of iTulip (and before that, the Daily Reckoning) I’ve always taken the position that they are in no way a substitute for the metals themselves or metals tracking funds. Gold mining stocks for example are stocks, not gold. They have business risks that gold doesn’t … management, natural disasters, strikes, profits, losses, balance sheets, etc.
This doesn’t mean I think they should be avoided; I own some mining stocks myself. But they should be treated as part of a stock allocation, not a gold or commodities allocation, separate from bullion tracking funds, such as those included in the model portfolios.
More color on platinum:
Platinum Rising
Is it Finally Time to Buy Platinum?
Soaring Platinum’s Loud Signal
How Much Higher Can Platinum Go: “It Feels Like Someone Is Loading Up On A Flat Price Position”
I was aware of various conditions for higher platinum prices for the past year or two and was watching for a run where it wouldn’t be dead money. Once platinum finally caught a bid and I saw it as the possible beginning of a trend, I was surprised at how quickly and relentlessly the price went up. I waited nearly two weeks before I finally gave up yesterday, held my nose, and increased my position slightly.
Just a few hours after I finally bought, we get a 5.4% correction today. 🙂 I suppose on the bright side, I had sold some U.S. Treasury bonds to fund the purchase of the platinum and those bonds fell in price today, too. It seems that nobody wants U.S. Treasury bonds at these confiscatorily low yields even in the face of a very dangerous war between Israel and Iran so I sold more bonds today and bought even more platinum.
Aye, we’ve been covering platinum for quite a while. A couple examples:
Okay, So What Do I Do Now?
Platinum Rising
The missing link has been the catalyst. Probably the best way to sum it up is that everything else (gold, silver, copper…) went up a lot and platinum was the last cheap thing left.
But referring to your trading experience, for sure if I had a nickel for every time something like that has happened to me, well, I’d have a lot of nickels. I don’t know of any foolproof way around it, but do generally try to take small bites and make purchases on declines. In a case like this I might only buy a fraction of my total intended purchase, so when it inevitably declines right afterwards, I can buy at least some on a dip. Looks like this worked for you too. With the advent of commission free trading it’s a lot more practical to make small trades than it used to be.
No guarantees, but sometimes it works out well. When stocks tanked in March and April I bought some VT on each decline, the bigger the dip the more. None of the trades looked very good at first, but within a few weeks they were all in the green.
You don’t always always have the choice, but I try to buy most things when the media are down on them or better yet not even covering them. It’s really difficult to accumulate things when people are excited about them. I like boring stuff … like platinum has been for most of the past twenty years;-)
Short term forecasts are hazardous by nature, but my guess is this will die down soon and media attention will turn elsewhere. I have no intention of building a large allocation to something as niche as platinum, but if I do add to my position, that would probably be the most likely circumstance.
FWIW mostly though I look more at the portfolio as a whole than individual assets. I do pretty much the 18:18:32:32 Model Portfolio. That includes PLTM by default, at about 1% or so. In that mix of assets, there’s almost always something that’s doing poorly, but as a whole it’s been doing well.
Another erudite article on platinum:
A Report on the Bullish Case for Platinum
Platinum continues to impress. From a $900s handle only weeks ago, it’s now trading in the $1300s, at last check, around $1336.
Gold stalled? Look at platinum as prices hit a five-year high above $1,300
Platinum is still doing its Energizer Bunny thing. Now at $1377. The March 2008 all time high of $2290 will be broken.
Platinum will continue to run as gold prices take a break in Q3 – BMO Capital Markets
$1428
This ride is starting to make me nauseous. 🙂
This is a thrill ride … ride at your own risk!
Seriously, I wouldn’t be at all surprised to see platinum take a 10% tumble at almost any time. But I’m sticking with my new all time highs prediction … the only question is when. I would be surprised if it doesn’t happen before the decade is out.
Marc Faber has stated that it’s possible that platinum will trade at the same price as gold in about year, a very nice gain. I know a lot of the reasons why platinum should trade at a higher price than it currently does but I have no idea what’s going to cause it to go higher other than the price going higher (“it’s trending.”) I looked at the price chart over the past 5 and 10 years and I see nothing obvious from a technical analysis perspective; it’s essentially a flat line with an exception for the high volatility seen during the onset of COVID and the financial stimulus response.
I’m sorely tempted to go much larger into platinum, partly out of greed but also very heavily due to fear of government expenditures that are not being reined in and the very real threat of the Federal Reserve deeply cutting interest rates. I guess I’ll keep an eye on what Warren Buffett does with his $350B pile of Treasury bills.
A good thing about your government expenditure and inflation rationale is that the menu of defenses is extensive. Platinum would certainly be one of them, but so would others such as gold, copper, silver, other commodities, stocks, and real estate, so it’s not necessary to sacrifice diversification for protection. I like platinum and have for many years, but for me it’s a bit too niche for any more than a low single digit percentage or for play money. For what it’s worth, gold still makes up the majority of my metals allocation for the simple reason that it plays well with stocks. Other metals might outperform it purely in terms of returns (or they might not), but they also tend to correlate much more with stocks, letting you down when you most want some ballast. We did a deep dive on this in The Impermanent Portfolio. I have a long term allocation to copper, gold, silver and platinum funds, with gold generally making up about 75%-80% of it.
Of the four, platinum has been the cheapest for a long time, which probably accounts for its recent outperformance. I think it’s playing catch up. Silver buffs would make a similar argument for silver. I tend to agree it’s relatively cheap, just not so much as platinum (though some of that cheapness has been priced out). As a practical matter, I generally weight silver and platinum equally, though I have been letting PLTM run over SLV as it rallies without rebalancing as of yet.
Stocks themselves continue to be a good long term inflation hedge. I’ve overweighted ex-US (XS) stocks relative to US on valuation grounds (about 50:50 versus the market at about 40:60), but in a weak dollar environment XS tends to outperform US anyway.
It’s hard to argue with Buffett’s stock investing record, but he has an irrational bias against gold. He complains that gold doesn’t do anything, but you could criticize cash on similar grounds if not worse. Imagine how much better he would have done if he had had some of that TBill hoard in gold. For that matter, gold has outperformed stocks so far this century.
I’ve read your postings on portfolio construction since the iTulip days over 20 years ago (!) and thanks to your writings, my portfolio is reasonably well-hedged against inflation with equities, precious metals, and real estate. I guess my comment about fearing inflation is an aspect of greed: if it were 100% certain that the U.S. dollar would get massacred over the next few years without a 2008 event, I would move 90% or more of my cash position into something else. As it is, I’m sitting on a large cash position because a lot of elements are in place for a 2008 event.
I am running something of a Permanent Portfolio although one with practically nothing (maybe 2%) allocated to bonds. Not too long ago, I had about 25% of my portfolio in cash but due to the other assets running up and my not rebalancing, the cash position is down to about 17%. I am sorely tempted to drop that to 5% or less but memories of 2008 and the hope (?) that we get a crash that completes the cycle prevents me from doing so.
Buffett’s seeming aversion to precious metals (as I recall, he had quite a bit of silver in the 1990s) isn’t a big deal to me. I kind of use what he is doing as a sentiment indicator and I don’t copy his positions. At the moment, he seems content sitting on a huge pile of Treasury bills. If he felt otherwise, he’d be buying equities (including in Berkshire Hathaway itself) at prices he doesn’t love or maybe even issue a dividend.
However, I do wish Buffett were much younger, say 30 or 40 years younger. It’s entirely possible he’s lost his edge (or even his marbles) or he’s cashing out overpriced positions and idling to let his successor deal with it when Buffett fully retires later this year. That is, I’m not certain he’s truly serious about the current stance of Berkshire Hathaway’s asset positioning.
You’ve probably noticed my allocation views have evolved over the years … especially in 2020, which I think ended a four decade secular bull market in bonds. I still own Treasuries, but a fairly mild mix that also serves as a semi-cash allocation. It’s about 5-10% SHV and 90-95% GOVT. The former is 0-1 year Treasuries and the latter 1-30 year Treasuries, so they jointly cover the whole market from cash to long bond. But as you’re probably aware, Treasury has concentrated issuance in shorter maturities (and GOVT is market weight), so the maturity and duration are both in the single digits and volatility nothing like you would have in a dedicated long bond position like TLT or VGLT.
The upshot is that although my overall bond allocation is closer to 15-20%, that includes a substantial portion short term bonds with and bordering on near cash equivalents.
I know what you mean about wanting to be prepared for a 2008 type event. It’s something not easily forgotten. A sizable USD-UST position would both ease the trip down and provide a nice stash of dry powder to take advantage of all the other discounted merchandise. The offsetting risk is what if another 2008 type event doesn’t happen. In which case a static USDT position is just an underperforming drag. Alas such a thing is nearly impossible to handicap.
Fortunately there are other advantages to holding a modest allocation to USDT (eg SHV-GOVT) even if such an event doesn’t come to pass. One of course is through less spectacular market events. We had for example a mini-2008 in the spring of 2020. There will be more. These pose similar though smaller opportunities. Since 2008, the Fed has had its finger on the inflation trigger, ready to fire whenever the dollar threatens to appreciate. So it seems likely that any developing 2008 type situation would be quickly met with an inflationary response and so look more like 2020. There’s also reduction in volatility even if you don’t successfully trade them.
Less obvious but related is the fact that including lower returning but lower correlated assets can increase returns. A portfolio is more than the sum of its parts … it is possible for a portfolio to outperform the individual investments in it. We explored this principle in Invest With A Demon, where we showed how two uncorrelated assets each with zero returns on their own could work to produce positive returns together.
This by the way is not only why I continue to hold a (diminished) position in bonds but also why I managed to justify patiently holding a position in platinum for years even though on its own it was dead money;-).
Given the government debt situation and the Fed’s ties to Wall Street, on balance I think the potential risk/reward balance has shifted in favor of holding more gold and less Treasuries. At least that’s what markets seem to think.