Gold/platinum spread entices traders
- Gold/platinum spread moving away from $351/oz high of two weeks ago
- Gold/platinum spread average at $184/oz
- Gold has hit 2014 high, but platinum has room for improvement
Physical gold is subject to seasonal demand and India is a big buyer in Autumn. Photo: iStock
By Stefan Vegh
When an anomaly occurs in the market place, it`s always worth extra attention as this often creates interesting trading opportunities. Currently such a situation seems to have developed in the precious metal markets. Gold and platinum are providing a rare opportunity as gold is the most expensive compared to platinum at any time in the last 25 years.
The top of the gold/platinum spread was at $351 two weeks ago and last Friday, the markets closed the second week lower (or tighter) at $268.
The story becomes much more interesting if we look at the average spread between the two precious metals. Gold has most of the time been cheaper than platinum, costing $184 less on average. This move to $268 could mean there is a turning point in the spread market.
The gold/platinum spread nears a potential turning point
Gold is mostly driven by market sentiment and is probably the best known precious metal, mostly in demand for its ability to preserve value in volatile times. It is also very popular as a physical asset especially in Asia.
Seasonally, physical gold is in demand especially during the Indian Wedding Season in autumn and before and during Chinese New Year January and February. Industrial usage is not that significant due to much cheaper substitutes such as silver and copper although gold has the non/corroding advantage, used mainly in dentistry, manufacturing electric appliances and space technology.
Platinum is 14-15 times rarer than gold and almost half of platinum production is used in the automobile industry in catalytic converters. Possible cheaper alternatives substitutes include palladium and rhodium (in diesel engines there is only platinum used due to low temperature).
Most of the world's production comes from four mines (one in Russia and three in South Africa)
Gold and platinum for October rising in seeming near parallel
Technically the two metals looks similar at first glance.
- both have advanced from lows around 30-35%
- both have broken significant resistance recently
- both seems to be in uptrend.
However there are some differences we should keep in mind.
- Gold has already reached its 2014 highs, Platinum is far away from those levels
- Heiken-Ashi show a healthy rally below, and we can´t say the same about the gold chart
- Open interest seem to be rising more rapidly in platinum than in gold
Overall looking at the pros and cons, the platinum/gold spread seems to be a quite interesting buy with a nice potential in medium term. However if the spread keeps widening above $351, we would have to concede that we've called this one wrong.
— Edited by Martin O'Rourke
Stefan Vegh is a trader in Saxo Bank's Cyprus office