Author

Ryan Giannotto, Director of Research

Ryan Giannotto, Director of Research

Ryan Giannotto is the Director of Research at GraniteShares.

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Commentary, Research,

You May Know Gold, but Do You Know Platinum?

It is the wedding band on your ring finger.  It is with you every time you’re travelling by car, three grams at least. This is the story of platinum, a metal that follows us and underlies our lives in subtle, yet profound ways. While the public may know platinum from a cultural standpoint, it is arguably underappreciated from an investment standpoint. Is it time for your portfolio to go platinum?

Beyond Gold

In terms of scarcity, platinum composes only 5 billionths of the earth’s crust – five in one billion.  To put that number in perspective, platinum is over 10 million times rarer than titanium.

Of the precious metals, gold often steals the limelight despite the other compelling options in the category.  In terms of scarcity, platinum composes only 5 billionths of the earth’s crust – five in one billion.  To put that number in perspective, platinum is over 10 million times rarer than titanium.  Moreover, the annual production of gold is about 17 times greater than platinum, with over 85% of the latter’s production concentrated in just two countries, South Africa and Russia. 

This true paucity of supply augers platinum’s claim as a store of value and potential safe haven asset.  If gold is already included in your portfolio, perhaps consider other – often overlooked – assets in the precious metals category as well.    

Historically Inexpensive

While platinum has been referred to as the “rich man’s gold,” the current market environment is pricing a very different scenario.  In fact, over the past 30 years, platinum has traded on average at a 31.3% premium to gold, while presently platinum is priced at a 32.9% discount to gold.  As depicted in the chart below, this effect is even more pronounced in the platinum-palladium ratio, another metal in the platinum metals group (PMG), which averaged 2.44 over the past 25 years but is currently only 0.64!

Source: Bloomberg

The chart above depicts the platinum-gold and the platinum-palladium ratios, where a value of 1 indicates parity and a value over 1 means platinum is the more expensive metal. One of the greatest fears of investors is buying at what hindsight will prove to be a market top, and platinum may decidedly not be subject to this concern.  The current platinum-gold ratio is a far cry from its peaks of 2.30 in 2000 or 2.27 in 2008. 

Furthermore, platinum has not participated in the robust rallies that have carried many precious metals from their lows in 2015, such as palladium surging by 141% or rhodium by 344% since the beginning of 2016.  In this context, platinum’s cheapness may render it a value proposition as mean reversion may be one of the most time-honored rules in finance.

Green Industrial Uses

Part of the allure of platinum is that the metal features a diverse array of industrial uses in a way that gold simply does not.  This hybridization of precious and industrial metal characteristics is somewhat akin to silver’s dual functionality, adding further depth to the value drivers of the metal. 

Platinum wields an uncanny ability to span the precious and industrial metals divide, while weaving a story of scarcity, broadening uses and outright cheapness.

Savvy students of chemistry may recall writing Pt above the arrow signs to some reactions back in school, and indeed platinum’s foremost use is as a reaction catalyst.  This unique property of platinum allows certain reactions to occur at lower energy levels without being consumed itself in the process. 

The foremost application of this characteristic is in catalytic converters for automobiles, reducing the impact of harmful exhaust emissions.  Platinum is also used extensively as a catalyst in fuel cells, an electric vehicle technology. Collectively, automotive uses account for roughly 40% of platinum consumption. Furthermore, cost-based substitution could expand platinum’s use case, as competing the auto catalyst palladium now carries a 50% price premium to platinum.

An additional 20% is utilized in biomedical applications and other high-value industrial applications. Corning even uses platinum in the production of Gorilla Glass for your iPhone screen.  This backdrop of widespread commercial use provides fundamental support to platinum’s value as a precious metal.

Diversification

Given these characteristics, platinum carries a unique risk profile enabling it to serve as a worthy diversifier in a portfolio role. As might be expected, platinum is remarkably uncorrelated to the broad market, with a correlation of only 0.17 to the S&P 500 over the past 20 years on a weekly basis.

More striking, however, is that over the same timeframe, gold only explains 40% of 27.7% of platinum’s performance.  This startling figure dispels the notion that precious metals can be typecast into the same basket, as each asset is remarkably sensitive to its own risk factors.  In other words, even if you already own gold in your portfolio, platinum still represents a whole new exposure not being accessed that could be used to lower portfolio level risk.

Finding assets that are not only uncorrelated to the market, but also uncorrelated amongst themselves is the science of portfolio construction.  Platinum wields an uncanny ability to span the precious and industrial metals divide, while weaving a story of scarcity, broadening uses and outright cheapness.  Investors know gold, but perhaps it is time to consider platinum.

Commentary, Research,

Correlations And The Art of A Terrible Tango

While diversification may be one of the most common refrains in finance, the irony is that it is home to widespread misconceptions among investors, both novice and seasoned alike.  Everyone intuitively understands the wisdom of “don’t place all your eggs in one basket” – such logic extends to everyday life – but investors often find themselves with far fewer “baskets” than they even realize.

What factors account for this discrepancy in diversification?

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