LAWRIE WILLIAMS: Gold:Silver, Gold:Platinum and Platinum:Palladium ratios as investment guides
For many years the Gold:Silver ratio (GSR) has been used by some investors as a guide to which of the two major precious metals make for the better investment. We also feel that the Gold:Platinum and Platinum:Palladium ratios (GPR and PPR) could also be utilised as guides for the precious metals investor as to where their money might be best placed. None of these make for short term solutions, but could certainly be considered as long term investment guides given that history tends to repeat itself.
Let us consider the Gold:Silver ratio first as this is perhaps the most prominent of the precious metals ratios and the one most followed. This is currently at around the 71 level, having blown out to over 120 intra-day in March 2020 – a huge new record high for the ratio – the previous high point had been a little under 100 some 29 years previous back in February 1991. If ever there was a silver buy signal then a GSR of over 120 provided it and silver investors who took advantage at the time will have already reaped substantial rewards. A high GSR suggests a lower silver price in comparison with gold and vice versa. The average GSR over the past 100 years has been around 50, so the 120 plus level was a real outlier.
But the GSR can be quite volatile. The committed silver bull will tell you that the historic GSR was around the 16 mark and they tend to be confident that it will return to that level but the last time it even came close was at the beginning of 1980 at the anomalous time when the Hunt Brothers almost succeeded in cornering the silver market. Over the past 20 years the GSR has averaged around the 66 level, which is probably a far more relevant figure. Indeed over this time period the GSR has moved between a low of a little over 30 in early 2011, when the silver price almost reached $50 an ounce in what could be described as a buying frenzy, and the aforesaid 120 plus in early 2021. However, much as the spike up to 120 and above could be considered an outlier, so too could the spike down to around the low 30s. If one disregards these two anomalies, the GSR has largely ranged between 45 and 100 (with an average of around 70) over the past 10 years and we wouldn’t expect it to breach either of these levels in the foreseeable future.
It used to be said that if the GSR dropped to 40 or below, one should invest in gold. Conversely at a GSR of 80 or above, silver would be the better investment choice. In our opinion, particularly given that silver is perhaps more of an industrial metal nowadays rather than a true precious metal like gold, as its use in regular coinage has disappeared, this investment guidance range has probably narrowed hugely. Now we would suggest a GSR of below around 55 favours investing in gold, while a GSR of 70 or above favours silver. Thus silver looks to be marginally the better investment prospect at the current GSR.
But, as always with silver, pricing can sometimes disappoint substantially as witness the blow-out of the GSR to 120 plus in last March. Gold thus usually remains the safer investment bet, while silver is almost always more of a speculative gamble due to its comparative volatility.
The second of the precious metals ratios we will consider here is the Gold:Platinum ratio (GPR) which is currently hugely out of line with historical precedent and trend followers would see this as at least a long term buying signal for platinum. Platinum demand is currently almost totally in the industrial sector and thus should perhaps rather be looked upon as being far more subject to traditional metal commodity supply/demand fundamentals than as a true precious metal, although it retains an element of use in jewellery fabrication. Historically, platinum has tended to be a more expensive metal than gold, but the reverse is quite the opposite at the moment, with the platinum price lagging that of gold substantially. The chances of the former catching the latter up and restoring the historic balance look slim in the short and medium term but in the long term recent platinum price movement suggests that the balance might be being adjusted more in platinum’s favour than it has been for some time now, but not by nearly enough to redress the historic balance – probably for a few years – if ever.
Much of platinum’s latent potential though will depend on industrial demand moving forward. Global platinum production had been in substantial surplus up until around the past year or so, but the latest figures suggest there may have been a big supply deficit in 2020 due to some serious new mined supply and refining disruptions in South Africa – by far the biggest producer of the metal. According to the latest estimates from the World Platinum Investment Council (WPIC) there could still be a deficit in 2021, although a much smaller one, but this could be exacerbated by further supply disruptions in South Africa. The country is seeing a particularly high COVID-19 virus pandemic infection rate, together with a worrying new virus variant, which, in turn, could impact new mine production during the year.
Much also will depend on whether the now considerably less costly platinum may start to eat into some of its sister metal, palladium’s, current dominance of the global market for petrol (gasoline) engine exhaust emission control catalysts. The current GPR is at around the 1.8 level – double the average of the last 20 years. Indeed it has been as high as around 2.5 as recently as mid-March 2020 – a good buying signal for platinum in retrospect.
On the basis of the above we can come up with similar investment guidelines for the GPR as for the GSR. On this basis at a GPR of say 1.5 or higher one should consider investing in platinum. At a GPR of 1.0 or lower gold probably remains the better bet. However one should bear in mind that platinum is also very much an industrial metal. Going forward, demand should rise as global economies begin to get back to normal – and if platinum at its newer heavy price discount to palladium begins to eat into the latter’s prime market then a platinum price recovery could happen far quicker than would have been suggested only a few short months ago. The big question is, is the current price differential sufficiently large to justify a fabricating switch given that if this were to happen the price differential might quickly fall away?
That now brings us to the third price ratio we are looking at – the PPR – or Platinum:Palladium Ratio. For most of the past 20 years platinum has been substantially more expensive than palladium, but for the past three years the reverse has been true. The current ratio is around 0.45 but just over 10 years ago the ratio was over 5 – thus more than 10 times higher than it is now. (The average ratio over the past 20 years is 2.43.) This is not the first time that palladium has been more expensive than platinum – it happened for a relatively brief period between 1999 and 2001 for example – but such occasions have been rare in the long term pricing relationship between these two sister metals.
The big game-changer between the demand for the two metals commenced in around 2009 when palladium emerged to challenge platinum’s role as the primary catalytic metal in the enormous, and growing, petrol internal combustion engine exhaust emissions control market. Since then its demand levels have accelerated, as has the metal’s price, overtaking that of platinum around three years ago. As increasing environmental controls have been implemented, palladium loadings in the exhaust control units have increased, stretching the supply/demand balance even more. Palladium demand increased to the extent that a substantial metal supply deficit developed, with the price initially surpassing that of platinum in late 2017 and the price differential has grown as the production deficit widened substantially. This has resulted in the PPR falling to around 0.4, although in the past month we have seen a bit of a recovery in platinum which has regained a small amount of its ground compared with its sister metal.
Once palladium started to replace platinum in the petrol engine exhaust emissions control systems, ever ongoing research into the palladium-based catalysts arguably suggested they had become superior to the former platinum-based catalysts, while platinum-based catalysts continued to be preferred for the much smaller diesel engine market. However, the big price differential meant that the ongoing research into palladium-based catalysts was not duplicated with similar developmental research into platinum-based ones for petrol engine systems. We suspect manufacturers may be undertaking much more research into the now much cheaper platinum-based systems which could lead to platinum regaining some of its market in the petrol engine emissions control market. According to the WPIC manufacturers may be keeping quiet on announcing any breakthroughs here in order to retain any competitive market advantage. However, even if this is the case, it is likely to take time for platinum to catch up - if it ever does.
Ultra long-term palladium’s price is likely to be limited anyway as electric vehicles (EVs) begin to dominate the light vehicle market. Several governments are already banning internal combustion engine manufacture and sales to be implemented a few years hence in favour of non-polluting EVs. Pure EVs do not utilise palladium, although hybrids do, but the advent of EV leading the light vehicle market may not be for several years yet, but it is coming.
Given such developments, we do suspect that platinum may slowly regain some of its former price relationship with palladium, but perhaps not for some years yet before any significant price rebalancing occurs. Looking at the PPR ratio as a guide on this basis we would suggest that at a ratio of 0.5 or lower one should perhaps choose platinum over palladium as the better investment. It is difficult to look at the other end of the ratio scale, though, as we do see the long term future for palladium as dubious, but perhaps not for a few years yet, unless some big new mrket for palladium develops.
Even if platinum does make some inroads into palladium’s principal market, it may take a couple of decades at least for palladium to be phased out of the autocatalyst market completely and with palladium supplies remaining tight prices could well hold up well over this period. On this basis – for a limited time up until EVs start to dominate the light vehicle market – perhaps a PPR of say 1 might suggest a preference for short term investment in palladium, but we don’t really see such a ratio likelihood developing until it is actually too late for palladium!
If, however, we do begin to see platinum replacing palladium in the petrol engine autocatalyst market this could be something of a game-changer for the metal so watch out for any concrete news on that front. If this does start to come about, the balance between platinum and palladium prices could rapidly reverse again with production of the former perhaps moving into a permanent supply deficit, and the latter moving towards a supply/demand balance - or even a surplus. But then if platinum becomes the more expensive metal again then palladium might regain its advantage – at least until the growth in EVs means it is phased out of this lucrative market altogether. It’s all a matter of timing!