The Other Precious Metals Duo

April 21, 2011

It's not all about GLD and SLV.


There's been much discussion about the recent rally in silver. Prices for the white metal have gone absolutely parabolic recently, rising over 42 percent since the start of the year. Will the $50 record set back in 1980 when the Hunt brothers tried (and failed) to corner the market be surpassed? Who knows; when you've got momentum like this, anything can happen.

But it isn't just silver's absolute price performance that's been so astonishing. Consider silver's appreciation relative to gold prices. The yellow metal is only up a fairly modest 5 percent this year—a bit underwhelming considering prices seem to hit a new record every time we take a look at the headlines.

This divergence in the performance between the two metals has made silver the most expensive it has been relative to gold in 28 years. Precious metals watchers often use the gold/silver ratio to illustrate the value of gold relative to silver. In this case, a picture says a thousand words:


Gold/Silver Ratio
Source: Bloomberg


Bulls will argue that as long as the rally in precious metals continues, the ratio has nowhere to go but down, as silver acts as the higher beta play in the space. But I'll say it again—who really knows if prices will continue to spiral higher or whether the ratio will continue lower, or what have you? All we know for sure is that silver is pretty darn expensive vs. gold relative to recent history, not to mention that gold itself is pretty lofty at $1,500.

Lost in all this conversation has been the other precious metals duo—platinum and palladium. After the Japanese earthquake, these two metals got hammered amid all the auto industry shutdowns and haven't recovered since. Meanwhile, gold and silver continued to surge.

That means that the relative value of platinum and palladium versus their precious metal cousins, gold and silver, has dropped significantly. Here again, a ratio is illustrative.

The platinum/gold ratio is around 1.18, or near the lowest levels in two years. For much of the last decade, the ratio had been above 1.5, even 2. Platinum's role as an autocatalyst accounts for 40 percent of total demand for the metal, thus Japan's woes have had a significant impact. At the same time, investment demand represents only about 6 percent of total demand; small potatoes relative to gold's 38 percent and silver's 26 percent.


Platinum/Gold Ratio
Source: Bloomberg


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