Monday, 11 August 2014

Metals not equally precious investments ...

While speculators are focusing on price changes of the metal of their choice to set up a trade, the long term investor is better off studying the price changes over the long haul and the relative price changes of one precious metal to another. It is most common to compare gold to any other precious metal through e.g. a Gold-to-Silver, or Gold-to-Platinum ratio. This tells you how many ounces of the second precious metal one ounce of gold would buy.
Note: After the September/October slide of precious metals, an update of this article was published:
Metals not equally precious in their slide

Last two weeks we have witnessed silver retreating more rapidly than did gold and since last Wednesday, silver did not follow gold's recovery either. The Gold-to-Silver ratio (GSR) has been rising almost daily. Is this part of a trend or just a temporary surge of the GSR?
A graph over the long haul may tell you more:

Silver fix in pale (LME in USD/oz) on the left scale and gold-to-silver ratio (GSR) in dark on the right scale (click to enlarge)

We start off in 2011: As silver is challenging the 1980 all time high, its rapid rise in spring 2011 leaves gold behind, though the yellow metal is itself in an uptrend. Early May 2011 silver drops out of its parabolic rise and the gold to silver ratio (GSR) abruptly jumps up from a low at 31.4 (Apr 27) to a high at 45 (May 12) in only two weeks time. As gold makes its all time high with a double top in August/September 2011, silver has been climbing out of its June 2011 low to about $43/Oz. The GSR holds firm near 45. Yet the gold sell-off later in autumn 2011 is detrimental for silver also. The white metal drops to near $28 as gold sells off to $1615, making the GSR jump abruptly to over 57 as early as Sept 26, 2011. An ounce of gold buys over 80% more silver than it did 5 odd months earlier! Silver being called "gold on steroids" indeed seems to have a whim of truth in it. During the gold spring rally, silver outpaces gold once more, making the GSR fall to 48 on Feb 29, 2012. Leap day also means the end of that rally. Again over 2013 we clearly distinguish the late June gold sell-off, whereby silver once again leverages gold to the down-side. GSR peaks above 66 on June 27, 2013. Some more swoons and recoveries later, we still face the GSR near its high over a time frame in excess of three years. There is so far not the least indication of any meaningful turn-around on the chart. 

Gold to Platinum ratio

Platinum is our next focus. The Gold to Platinum ratio (GPR) has been discussed on a very long time frame in a previous blog post: Platinum group metals: a story of scarcity and industrial needs. The long term graph therein has been updated to include data as of Aug 8, 2014. We now repeat the above exercise from the beginning of 2011 onward for platinum.
Platinum fix in pale (LME in USD/oz) on the left scale and Gold to Platinum ratio (GPR) in dark on the right scale (click to enlarge)

The above graph shows platinum in USD/Oz on the left scale and the GPR on the right scale. As the sovereign debt crisis escalates in Europe, the economic recovery since 2009 comes to a grinding halt. Stock markets correct and Europe slides in a recession. Especially the automotive industry (through the catalytic exhaust filters one of the most important consumers of Platinum and Palladium) is having a hard time and cuts its production volume. Several car manufacturers are even closing down plants in Europe. The outlook is most bleak. The slide of the platinum price in autumn 2011 makes the GPR jump abruptly above one. During the financial crisis the GPR briefly touched 1, whereas the GPR had been trending lower before. Platinum however has little in common with many other industrial commodities, where a drop in price makes demand rise significantly. It is on the contrary the supply side getting deep into trouble. Violent strikes erupted at Lonmin's Marikana mine in South Afirca, the most important platinum producer. This only made platinum rise temporarily and shortly bring the GPR down to 1. As the crisis cooled down, platinum prices fell back till way into summer 2012: the GPR quoted above 1 for an extended period. It required above ground supplies running low to make platinum recover to $1700 later in 2012.
Despite precious metals selling off in triple selling spree during 2013, nor the April, nor the June or December dips for gold are matched by platinum dropping lower. On the contrary, the GPR systematically drops below 1 from the second quarter onward. In 2014 the GPR twice tested the 0.85 resistance (on Jan 20 and May 30). It now stands at 0.89. Though platinum prices left behind the 2013 support level of around $1220, it has a hard time breaking above $1500/oz. Platinum prices still are too low for production to be profitable at many of the South African mines. Revenues may suffice to pay for current expenses and personnel costs, they don't allow the capital expenditure needed to maintain platinum ore reserves and to assure the production level for some years to come.

Gold to Palladium ratio

The last metal in the row is palladium. This metal has many properties in common with platinum. Its main use is in catalytic exhaust filters for gasoline engines. Palladium is less used in electronics than is platinum. The metal often is found in conjunction with platinum.
The price of palladium always has been lower than that of platinum, but it does vary quite a lot. Until the 1990's, Russia had a stockpile of palladium, coming from the Norilsk nickel mine. As that supply got nearly exhausted, there has been a speculative surge of palladium to above $1000/oz early in 2000. Palladium dropped back to below $200/oz during the 2002-03 economic crisis. A history in brief, but we now focus on 2011-14 as we did for the other precious metals.
Palladium fix in pale (LME in USD/oz) on the left scale and Gold to Palladium ratio (GPdR) in dark on the right scale (click to enlarge)
The profile of the graph is much similar to that of platinum. The gold to palladium ratio (GPdR) starts off quite low (high Pd prices) in 2011 and like platinum the price of palladium also heavily suffers during the sovereign debt crisis and the stock market correction in 2011. Palladium lagged as gold made its all time high and then fell off a cliff as the yellow metal retreated in autumn 2011. From below 1.75 the GPdR approached 3 as Pd bottomed near $550/oz. Palladium weakness lingered on a while longer than did platinum. In autumn 2012 the GPdR still stood around 2.75. After palladium started rallying by towards the end of that year, its price level remained remarkably resilient during 2013 as gold plummeted in three sell-off waves. Lately, palladium has been rallying much more than did platinum. Unlike platinum, its price now is higher than in January 2011 and the GPdR has dropped to test and break the 1.5 level a few times.


When diversifying bullion investments, the long term perspective for platinum seems more promising than that for silver. The GPR has turned a corner and is on a downward slope: an extended period of cheap platinum lays behind. 
Palladium has been appreciating in price more than did platinum, recently reaching a three year high. The GPdR is bottoming at 1.5 and may break below. It's a compelling story: palladium investors surely have momentum at their side. The palladium rally still is a decent short term play, however the rally is quite long in the tooth and there probably is less potential left for Pd over the longer term.
The Gold to Silver ratio has been trending higher ever since May 2011, putting down a series of successive higher local minima and higher local maxima. Once more above 65, there is no evidence that the GSR has turned a corner and that silver is bound to outperform gold during the months (or years) to come.
These conclusions for bullion investments do not translate into similar ones for miners! Silver miners have been remarkably resilient considering the continuing price erosion of the main metal they mine for, whereas platinum miners still are at their struggle for life.


  1. I have a bunch of silver-plated flatware, however, I don't know what the base metal is.
    It's not magnetic, and, when I cut into the pieces, it looks bright silver. There's no 'coppery' or 'brassy' coloring to it. Can anyone tell me what the base metal might be?
    how to refine platinum

  2. Your silver plated flatware probably is an alloy. There is a non-magnetic stainless steel (with 18-20% chromium, up to 10% Nickel and some trace elements). 'German silver' is a copper - zinc - nickel alloy with a silvery gloss. More malleable than stainless steel, 'German silver' is also used in coins.