Gold to Platinum Ratio
The gold-to-platinum ratio is the price of gold divided by the price of platinum. It describes how many ounces of platinum are needed to purchase one ounce of gold, indicating the relative strength of gold prices compared with platinum prices. The indicator works just as the gold-to-silver ratio and it shows whether gold is undervalued or overvalued relative to platinum (and vice versa). When the ratio is low, it means that platinum is overvalued relative to gold. When the ratio is high, it means that platinum is undervalued relative to gold. Investors can thus use the ratio as a timing indicator deciding when to buy gold or platinum, or which metal to buy at any given time.
The chart below presents the number of ounces of platinum it has taken to buy a single ounce of gold since 1975 (we use futures prices, as the data series for the London fix for platinum is available only beginning in 1990).
Chart 1: Gold-to-platinum ratio (price of gold divided by the price of platinum, red line, right axis), price of gold (yellow line, left axis, Comex gold futures, front month) and price of platinum (blue line, left axis, Nymex platinum futures, front month) from 1975 to May 13, 2016.
As one can see, the ratio has been below one most of the time. It means that platinum has traded higher than gold, as one ounce of gold has bought less than an ounce of platinum. It makes perfect sense as the supply of platinum is lower than the supply of gold (there used to be strong industrial demand for platinum). However, gold started to be more expensive than platinum at the beginning of 2015, indicating low confidence in the global economy. This is because gold is mostly a safe-haven asset, while platinum is an industrial metal. Thus the gold-to-platinum ratio is a useful indicator of economic confidence among investors. Gold tends to outperform platinum when the confidence in the government, economy and fiat money is deteriorating, while it underperforms platinum during periods of monetary stability, economic growth and high confidence in the financial system. Generally, the gold-to-platinum ratio was rising during the boom in the gold market in the 1970s and 2000s, and was declining during the bear market in gold during the 1980s and the 1990s.
We encourage you to learn more about the shiny metal – not only about its relationship with platinum, but also how to successfully use gold as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.