Is it possible that platinum is a better buy than silver? Here’s a silver stacker’s in-depth look into that question. His findings may surprise you…
by Matt Orloff
A Silver Stackers Case for Platinum.
Platinum could potentially be a better buy than Gold and Silver.
First the negative…
Before showing the bullish facts for platinum we should address the last few years decline in price. My view is the announcing of moving away from using it in catalytic converters is the larger reason as well as a cheaper Palladium option (until relatively recently) being a close second. However, I think market sentiment has over reacted to this as automotive demand (40%) has barely declined and for this to take place is unrealistic in the short to medium term.
The path of most precious metals stackers starts with an understanding of the nature of fiat money and then moving into Gold. However, after learning of the current supply/demand fundamentals of Gold and Silver mining and the outlandish 80:1 Gold to Silver Dollar ratios, the majority of us then move to Silver. This is because we expect the next run up to increase at some rate from 2X to 10X faster than Gold’s rate in a future precious metals bull market.
Platinum may have a similar strength.
Let’s dive in to the numbers:
As we can see while the Silver to Gold Ratio is much higher than the 1980 low it actually was much worse at one point in the early 1990s (still some historical downward risk). Still, most of us agree that its long overdue for a reversion to its mean, and will overshoot to something between a 14 (1980) to 32 (2011) ratio with Gold. We also mostly agree that there is more Silver than Gold above ground, but only about twice as much.
How many of us serious stackers have even looked at a Silver to Platinum ratio? Utilizing the same logic we apply with AU:AG we can see that even though Silver is trading at these abysmal prices, Silver priced in Platinum is close to its all-time low. We can also see that while Silver has traded at 100:1 with Gold, that at one point it took 150 ounces for one ounce of platinum. And last, but not least, while the amount of Gold and Silver above ground is in the billions of ounces, the amount of Platinum above ground stocks per the World Platinum Investment Council is only about 2 million ounces. Platinum annual production equates to about 6 million ounces mined and 2 million ounces recycled with demand also outpacing supply over the past few years.
Putting this into perspective, if tomorrow every single platinum and silver mine stopped, silver demand could probably be met for about 2 -3 years. Platinum demand would only be met for 2 – 3 months. Of course, this is where the market would kick in and cause prices to rise, but either way a real silver shortage is realistically a 5 years or more off, while a Platinum shortage could become a reality if investment demand were to increase.
As of this wasn’t enough of a fundamental case for the metal, approximately 7 out of every 10 ounces of Platinum mined comes from South Africa which is heading into some deep economic and racial turmoil. The Rand has been having issues, and there is government sanctioned white genocide in its beginning phases. Recently Impala (2nd Largest Platinum Producing company) announced it will be shutting down a third of its production (Approximately 5% of Global Mining Supply). According to Statista the average cost of mining Platinum is nearly $1000/ounce. This equates to a commodity that is currently priced nearly 20% under its cost of production.
Let us take a look at Platinum in regards to Palladium…
As we can see other than for a period 20 years ago where Palladium spiked due to a shortage, Platinum is at a near all-time low ratio with Palladium and could easily quadruple in price against its counterpart. As I mentioned, my theory is that Palladium is been being used as a cheaper catalytic converter option to Platinum which has now run its course and overshot Platinum in the past months. Industrial purchasers at some point will realize they’re paying 10%/$100 more for a historically cheaper metal and more than likely revert back to Platinum.
How about gold?
Gold as far as I can tell right now is at a historic all time high in comparison to platinum! We hit a low of 0.66 a month ago but are still operating in uncharted waters. As we can see Platinum typically trades at a 33% to 50% premium to Gold yet it is pushing a 33% discount.
How about a crash litmus test?
History doesn’t repeat, but it does rhyme. In 2008, all metals pretty much fell simultaneously and made lows together. One thing people forget to do is to inflation adjust their numbers from previous extremes in the market. As we can see here platinum (currently $787) is the only metal trading below its $2018 inflation adjusted low. As a silver stacker who has dollar cost averaged around $18 – $20, it is very sobering to realize that in the event of a crash it would not be out of the realm of possibility to see it briefly touch $11. We can see the same with Gold and Palladium as well.
How about a “moonshot” litmus test?
All four metals had a spike in 1980 and 2011. As I mentioned Palladium had a spike in 2001 which on an inflation adjusted level slightly beat its 1980 inflation adjusted price. An interesting thing that I learned conducting this research is that if all of the metals spiked in 1980, then the Hunt Brothers really weren’t the reason why or at least were a less important factor to silvers rise. When we look at these numbers as disciplined stackers, remember these are prices have already occurred in terms of purchasing power.
Now putting it all together:
The assumptions in the calculation are based on the following.
1 – Historical Highs will more than likely reoccur.
2 – Historical Lows may reoccur first.
3 – Based off of inflation adjusted lows and inflation adjusted highs giving more accurate value.
On the historical risk side:
We first take the current market price of each metal, divide by its inflation adjusted low. This gives us its historical risk potential. Anything above a 1 means there is potential downward risk. As we can see Platinum is the only metal that has overshot its historical risk potential. Gold and Silver on an inflation adjusted low risk basis are overvalued at around 40% Palladium could be 370% overvalued.
On the historical reward side:
We now take the inflation adjusted high ranging back to 1980 for Platinum/Gold/Silver and 2001 for Palladium and divide by the current market price. We can see all the metals are drastically below their inflation adjusted highs with Silver leading the pack and Palladium on the lower end.
Putting it together:
Dividing the Reward to Risk Ratio in inflation adjusted terms gives us an honest mathematical scoring system to which metal stands to gain the most. Palladium is a huge risk based on this analysis. Gold stands to make 50% gains. Platinum looks to outperform Gold by a factor of 3. Silver looks to outperform Gold by a factor of 5.
While being in undervalued intrinsic assets is a safe bet against failing fiat and now digital currencies, based off of previous worst and best-case scenarios, supply and demand fundamentals, and current market ratios Silver is indeed the winner with Platinum as a great alternative. When factoring in South Africa’s geopolitical tensions, significant mine closures, cost of production, and true scarcity, this could be a great opportunity to diversify into a different precious metal other than silver.