Last week in Money and Markets, I pointed out that the not-so-precious base metals are about to get a boost. That’s thanks to increased infrastructure spending, namely on China’s New Silk Road.
Industrial metals like copper, iron ore, steel and more are poised for major gains ahead. That’s after being on a roller-coaster ride over the last few years.
But keep in mind that they’re not all created equal. In other words, some metals will perform much better than others.
For precious-metals bulls, some metals play a dual role. They’re in demand both for their industrial uses, and as a store of wealth.
Case in point: Platinum and palladium. These “white metals” are unique in that they allow investors to profit from the upside in global growth. At the same time, they offer protection as a safe-haven amid economic uncertainty.
Both metals are in high demand for industrial uses. You can find them in automotive catalytic converters, as well as high-technology and healthcare applications.
But the similarity between palladium and platinum ends there. Especially when you consider the vast difference in performance recently …
Palladium prices are on fire, as you can see above. In fact, right now it is the best-performing metal, bar none.
So far this year, palladium is up 30%. It’s beating 33 other major raw materials including aluminum, copper and, yes, even gold.
In large part, palladium’s outperformance comes down to one simple reason. That is, supply and demand.
Global palladium supplies are set to fall short of demand for a sixth-straight year in 2017. Car-makers have been switching to less-expensive palladium for catalytic converters. So, mined production hasn’t kept up with demand since 2012.
Ironically, palladium’s strong rally means that its price has now almost reached parity with platinum. (Historically, palladium has traded at a discount to platinum.)
Platinum meanwhile has languished this year, with prices up just 2.9% year-to-date.
That makes it the year’s worst-performing precious metal.
With palladium performing 10 times better this year, and the two metals nearly at parity, it’s likely only a matter of time before the demand balance swings back in favor of platinum once again.
After all, car-makers can use the metals interchangeably. So can precious-metals investors.
And that’s the crux of this story: Platinum is remarkably undervalued right now from a historical basis. And it should provide the best buying opportunity of any metal … industrial or precious … going forward.
Just compare the price of platinum to its more popular precious metal cousin: Gold.
Platinum is 30 times rarer than gold, and the annual production of platinum is only about 5 million troy ounces. (Compare that to gold’s 82 million troy ounces.)
That’s why, historically, platinum has traded at a premium to gold — often a big premium — but not anymore.
While gold challenged $1,300 an ounce recently, platinum languished near its 52-week low around $940 an ounce.
That’s unusual. And it tells me platinum may be the most undervalued precious metal right now. That means it could offer much more upside potential than gold.
Consider that from 2000 to 2011, platinum consistently traded at a premium to gold. In fact, every year from 2002 to 2008, platinum was priced at 1.5 to two times the value of gold!
But over the last few years, platinum has traded at a discount to the yellow metal. Just last year, platinum reached its biggest discount EVER to the price of gold at $360.
That compares to a long-term average of a $150 premium for platinum over the price of gold. And in 2008, platinum traded as much as $1,200 above the price of the yellow metal.
In the past, whenever platinum traded at a discount to gold, it didn’t last very long. Platinum prices typically soared to close the gap.
The last time platinum reached a double-digit discount to gold was briefly in 2012. By mid-2014, platinum was trading at a 16% premium to gold. That’s a swing of 28% in value in favor of platinum!
And right now, platinum prices are trading at a discount of more than 20% to the yellow metal.
Granted, spreads like the platinum-to-gold ratio can diverge for long periods of time, before they revert back to normal. But history tells me platinum is ridiculously undervalued right now in comparison to gold, and palladium too.
So, I’m willing to bet on a much-bigger rally in platinum ahead.
Good investing,
Mike Burnick
P.S. This week, I’m alerting my Real Wealth Report members about a leading platinum mining stock that’s trading just over $5 a share right now, but could easily double — or even triple — once platinum prices rebound. To get all the details about this brand-new recommendation, click here.
Stuart June 28, 2017
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