News Analysis date published New: 
Monday, January 9, 2012 - 10:30
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Monday, January 9, 2012 - 12:27
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Monday, January 9, 2012 - 10:30

This Rare Metal Hasn't Been This Undervalued in 20 Years

Monday, January 9, 2012 - 10:30am

I love finding a bargain. After all, who doesn't?

And in the precious metals space, it isn't hard to find. All it takes is a simple chart to see what's undervalued.

Consider this example.

Back in August, I saw that a major disconnect had developed between the price of gold (which was going up) and the share prices of gold miners, which were relatively flat.

The selloff created a rare disconnect in one of the world's longest-lasting bull markets -- gold. When last I saw this opportunity in 2008, I pounced and pocketed a 100% gain in less than seven months. It may take a little longer this time around, but the chart speaks for itself.

Now, I've found a similar opportunity.

As of Jan. 6, gold spot prices were hovering around $1,618 per ounce, and platinum was selling for about $1,401 an ounce.

That means it takes just 0.87 ounces of gold to buy an ounce of platinum. Or, from another perspective, you could trade in one ounce of gold for 1.15 ounces of platinum.



This is pretty rare.

It's not so much the size of the gold premium that matters -- the very existence of a premium is highly unusual. In fact, gold hasn't been worth more than platinum since 2008. Before that, you have to go back to January 1992 to see the last time the yellow metal traded this far above parity to the white one.

In other words, platinum prices relative to gold are at their cheapest level in nearly 20 years.

This has been a one-sided relationship over the years -- platinum almost always has the upper hand over gold. That's to be expected, considering platinum is about 30 times rarer. Annual platinum production is just a tiny sliver compared with that of gold.

That's what makes this such an odd occurrence.

The last time it happened was December 2008, when gold was soaring as a safe haven, just as weak auto sales were sapping demand for platinum (which is most commonly used in catalytic converters). In that particular case, platinum retook gold just a few days later and went on to post a powerful 130%-plus gain during the next two years.

This time around, the extreme ratio has persisted for a while.

On Jan. 1, 2011, it took 1.25 ounces of gold to buy one ounce of platinum. That exchange rate has now slipped all the way below 1:1. This is more than just a statistical aberration.

Platinum prices have on average traded 64% above gold during the past decade. Based on that, and with gold at $1,618 an ounce, you might expect platinum to have surged above $2,650 an ounce. Instead, it has sunk below $1,650.

This means either gold is too expensive, or platinum is too cheap.

Personally, I think it's the latter.

Risks to Consider: Like many commodities, platinum prices can be volatile. In fact, they were down 20% in 2011. But I still think this in an opportune entry point for long-term investors.

Action to Take -->
Speculators might consider this an opportune time to enter a pair trade by going long platinum and short gold. That would remove any outside influences and just capture the performance of one metal against the other.

This strategy has a high probability of success, as there's no reason for platinum to be below gold. But I'm not a trader, nor am I betting against gold. I think the better solution for long-term investors is to simply overweight platinum -- and not just because a chart tells them to. Platinum group metals (PGMs) are irreplaceable and will remain in high demand.

You won't find any publicly-traded U.S. platinum companies, though. But First Trust has conveniently packaged all of the world's top suppliers in one place in its First Trust ISE Global Platinum fund (Nasdaq: PLTM), which offers a diverse global basket of 24 major producers, including well-positioned leaders such as Impala Platinum and Anglo Platinum.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.