By Michael Brush, MarketWatch
If you missed the nice run in gold so far this year, here’s a way to make up for lost ground.
Platinum has already crushed gold in 2016, advancing about 22% vs. 17% for gold.
This trend is likely to continue for a simple reason. Historically, platinum often sells for about 1.5 times the value of gold per ounce. Recently, though, it’s sold for about 80% the price of gold.
This discount may well continue to close — as it has so far this year — and then revert to a premium. As this happens, platinum will keep outperforming gold.
This is likely to happen for the following reasons.
First, history shows that the platinum-gold discount normally does revert to a premium. “Platinum has been at a sustained discount to gold only four times in the past 40 years,” points out Tom Winmill of the Midas Fund /zigman2/quotes/206471256/realtime MIDSX +3.13% . “In all cases it recovered in the subsequent year.”
In short, this is a classic “reversion to the mean” story. “It’s pretty rare for platinum to be below the price of gold,” agrees Ryan McIntyre, an analyst with Tocqueville Asset Management, who is also bullish on platinum.
But what might make this reversion happen?
A market imbalance
For one, it looks like demand for platinum exceeds supply. Last year, mining and recycling produced 7.82 million ounces of platinum. But demand was 8.2 million ounces, points out Winmill, citing numbers from the World Platinum Investment Council.
The difference came from “inventory,” or above-ground stocks. But this can’t go on forever.
That’s because relative to gold, the above-ground stock of platinum is pretty thin at 2.3 million ounces, or about 28% of demand. “I think the deficit is here to stay and we could run through those above-ground stocks,” says Winmill.
Platinum is tough to mine and smelt. And in South Africa, which much of the world’s platinum resides, mining is often hindered by strikes and electricity outages. “Extra demand is not met by a flood of supply,” says Winmill. “This is a recipe for a potential spike.”
Unlike gold, platinum is used pretty extensively in industry. This could help explain the unusual discount to gold. After all, many investors remain fearful that the global economy and manufacturing are going to sink into recession. Others worry that China’s growth is not all it’s cracked up to be.
But what if they’re wrong and Chinese and global growth pick up? Then platinum demand will improve, driving prices higher. U.S. Global Investors CEO Frank Holmes expects improved growth in China. He thinks job growth in China will boost demand for cars, which will spark demand for platinum.
As for global growth, it may not go gangbusters. But even 1.5% annual GDP growth will be enough to create sufficient platinum demand to move the price up, says Winmill.