Monday, November 23, 2015
It has only been this cheap three times in the last 36 years...
But by looking at a standard price chart, you'd never know it.
You can't see how cheap it is by looking at standard valuation metrics – like the price-to-earnings ratio or the price-to-book-value ratio – either.
The asset we're checking in on today doesn't have earnings... And its "book value" doesn't tell you anything.
Today, we'll show you one of the best ways to value platinum. As you'll see, it's cheaper right now than it has been in 30 years... And the last two times it got this cheap, 51% and 165% gains were just around the corner.
We could be nearing another similar opportunity. So we want to show you how to monitor the situation... and how to know when it's time to buy.
Platinum is a precious metal like gold. It's used in jewelry... and even in bullion coins and bars as a store of wealth. But unlike gold, platinum is also widely used as an industrial metal. One of its main uses is in catalytic converters, which scrub pollutants out of car exhaust.
Because of their similarities, platinum and gold will often rise and fall at the same time... But because of their differences, one of the metals will often outperform the other for long periods of time.
By looking at how many ounces of gold it takes to "buy" one ounce of platinum, we can see if one of the metals is cheap, relative to the other.
Below is a chart of the gold-to-platinum ratio going all the way back to 1980. When the ratio is above one, an ounce of gold is more expensive than an ounce of platinum. When it's below one, an ounce of platinum is more expensive. As you can see, platinum is usually more expensive than gold. But right now, gold is more expensive.
The price of platinum is down 43% since July 2014, compared with gold's 19% drop. The economic slowdown in China and around the world has put a damper on car and jewelry sales. This means less platinum is being used in catalytic converters, rings, and necklaces.
Over the last 36 years, gold has only been more expensive than platinum 17.5% of the time. It has only been 10% more expensive than platinum (a ratio of at least 1.1) 5.3% of the time. And it has only been 20% more expensive – as it is today – 1.3% of the time.
In other words, gold is extremely expensive relative to platinum right now... And platinum is extremely cheap relative to gold.
You can see in the chart above that platinum has only gotten this cheap two other times... in 1982 and 1985. Each time the ratio changed direction, it was like a stretched rubber band snapping back. Starting in September 1982, the ratio dropped from 1.45 to 0.93, a 36% drop, in eight months. From July 1985 to September 1986, the ratio dropped from 1.24 to 0.62... a 50% drop in 14 months.
These were periods when platinum vastly outperformed gold. You can see the two assets' performance during those times in the table below. The first time, gold dropped while platinum jumped more than 50%. The second time, platinum soared 165%... nearly five times as much as gold.
As you can see in the long-term chart of platinum below, these weren't the only two times you could have made money in platinum... But both times the ratio changed directions after hitting a "cheap-platinum" extreme, it was a great time to buy.
So how do you know when to buy platinum?
The chart below gives us a clue. It shows the gold-to-platinum ratio over the last two years... And the ratio is in a clearly defined uptrend. Today, with gold at $1,077 per ounce and platinum at $856 per ounce, the ratio stands at 1.26.
This uptrend may continue for months, or years even. Or it might break down next week. We can't know. But when the ratio breaks this trend line, you'll want to own platinum.
You can track the ratio as we do, on StockCharts.com, by entering "$gold:$plat"... And there are a few different ways you can buy. There are exchange-traded funds like the ETFS Physical Platinum Shares (PPLT). You can buy a platinum mining company, like Stillwater Mining (SWC). Or you can buy physical coins or bars from a precious-metals dealer.
Now that platinum has reached extremely cheap levels, we recommend keeping a close eye on it... So you'll know when to buy.
Brian Hunt and Ben Morris
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