Why platinum and gold are two very different beasts

FOLLOWING the meteoric rise in gold prices, the yellow metal is now trading at a premium to platinum, reversing the usual pattern. Spot gold was at $1,900.30/oz yesterday, with platinum at $1,885/oz.

Because of this, many are suggesting that platinum is underpriced. But a comparison with gold may not be the best method of valuation. “Due to its more industrial purposes, platinum doesn’t hold quite the same allure as gold does for being a pure safe haven investment,” says Angus Campbell, head of sales for Capital Spreads. “Investors feel that because gold has no mass market industrial use, it is the ultimate safe haven, despite the fact that it doesn’t yield anything and costs money to store.”

And it is not just the safe haven attraction of gold that is driving the increasing spread between gold and platinum. John Wong, portfolio manager of Golden Prospect Precious Metals comments: “I am not surprised that gold is more expensive relative to platinum at present as the demand and supply dynamics on both the metals are not the same. Platinum is driven by the auto market, which tends to move in line with the economy – which at present is pointing down – whereas gold is driven off its safe haven status, which looks increasingly attractive at present.”

While gold and platinum are both used in jewellery, that is where the similarities in their application ends. Around 20 per cent of platinum is used in jewellery, but its largest use, along with palladium, is in catalytic converters for cars. As such, a position on platinum can be seen as a position on the automobile industry and in turn a view on world economic growth. On the supply side, the car manufacturing industry in Japan has resumed production more rapidly than expected after the earthquake and tsunami earlier in the year, but US auto demand has been severely knocked by the dire state of the economy. US non-farm payroll figures on Friday showed that the US had created zero net new jobs in August. With so many Americans out of work, there is little light at the end of the tunnel for US automobile demand.

Platinum may look undervalued when stood alongside gold, but as QE3 looms large on the horizon, it seems that gold is going to continue to be the pick of the two.