Story syndicated from Mickey Fulp’s Mercenary Musings.
Price ratios determine relative value of the precious metals and are useful parameters in deciding which metal to buy at any given time.
In previous musings, I documented the history of gold and silver prices and gold-silver ratios from the United States’ abandonment of the gold standard in August 1971 to present (Mercenary Musing, May 9, 2016) and followed with a similar treatment for platinum and gold (Mercenary Musing, February 6, 2017).
In today’s precious metals analysis, I focus on platinum-palladium prices and ratios over the past 48 years.
A monthly average price chart for both metals from January 1970 to December 2017 is shown below. Note that while platinum was free-trading, palladium was fixed at $35-36/oz until mid-1972. We use London pm closing prices from Kitco.com.
The price charts show similar patterns and a general correlation of platinum and palladium prices. That said, there have been times when one is more volatile than the other, both metals are subject to parabolic spikes, and on occasion, their prices are strongly divergent.
As a result, platinum to palladium ratios show wide variance over the 48-year period and range from highs above 5.0 to lows below 1.0:
Our data set covers 576 months. The distribution of ratios in both tabular and chart format follows:
From our data set and the distributions of monthly average platinum-palladium ratios from January 1970 thru December 2017, I can glean the following:
Platinum and palladium are both small markets. According to the USGS, world production in 2015 was 189 tonnes of Pt and 216 tonnes of Pd and 2016 estimates are 176 tonnes and 208 tonnes respectively.
Compare these mined supplies with the 2016 production of gold at 3100 tonnes. From 1990-2016, about 4550 tonnes of platinum were mined versus 4800 tonnes of palladium. Cumulatively, these two
GM markets have been nearly equal in size over the span of 27 years for which production data is readily available.
From a compendium of sources, the average crustal abundance of both metals is around 3-4 ppb. Based solely on this fact, platinum and palladium should trade at about the same price. But they clearly do not because only 6.3% of the total record is in the range of 1.0 + 0.2. Since January 1970, the average price of platinum is $633/oz and palladium is $265/oz for an overall ratio of 2.4.
Therefore, I conclude that average crustal abundance and relative size of the markets have no influence on the price relationship of these two metals. A variety of world supply and demand factors have caused platinum to trade at a premium to palladium 96% of the time since 1970.
Significant variations in the relative value of the two metals are common but extreme ratios are quite rare:
Fluctuations in the relative prices of platinum and palladium are largely driven by:
Now on to more practical matters:
As my readers are aware, I view gold as the only real money. It is my safe haven and insurance policy against financial calamity. Platinum functions much more as a precious metal than palladium. In times of financial distress and economic turmoil, platinum tends to behave like gold with widespread hoarding. Palladium on the other hand, is almost exclusively an industrial metal with minor demand as a precious metal used in jewelry and investments.
The platinum-palladium ratio can ascertain whether one metal is over- or undervalued with respect to the other. The December monthly ratio below 0.89 is quite rare. In fact, ratios less than 1.0 occurred only once before in late 2000 to mid-2001. Also, the platinum to gold ratio set a historic low of < 0.72 in December.
Platinum is severely undervalued with respect to both gold and palladium but rest assured, these relationships will normalize in due course. Given the historically low ratios, I have chosen to buy platinum instead of gold over the last two years. Note however, the mark-up for platinum is two to three times higher than for gold and that additional cost is always a factor in my evaluation process.
I strive to maintain 10-20% of my net worth in physical bullion. Most is in gold but I always own platinum and silver, too. The product availability and options for buying physical palladium are much more limited than platinum and I have never chosen to own it. Despite its record high closing price of $1117/oz on January 12, I still consider palladium to be an industrial not a precious metal.
As a hoarder, my basic strategy for accumulating gold or other precious metals is to buy during downticks in price regardless of bull or bear market cycles. Folks, this is the way I see it, and the way I do it.