platinum crystals

Watching the Platinum-Palladium Ratio

November 16th, 2016 by

Much is made of the gold-silver ratio—the spread between the price of gold and its precious metal cousin, silver. Indeed, because of silver’s considerable industrial applications, this price ratio helps alert observers to trends in economics and the financial markets. At the same time, it can offer investing opportunities, as well.

More often overlooked is the platinum-palladium ratio. These two oft-forgotten precious metals provide a somewhat similar set of clues about the markets, investing, and the global economy.

Platinum vs. Palladium

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Both platinum and palladium are precious metals, though less readily recognized as such in comparison to gold and silver. They both belong to the Platinum Group Metals (PGMs), which also include rhodium, iridium, osmium, and ruthenium. The two metals share a variety of properties—most importantly, their usefulness in converting automobile exhaust into less toxic gases through devices known as catalytic converters.

The differences between Pt and Pd somewhat mirror the qualities that separate gold and silver. While silver prices usually have a significant correlation to gold prices, silver is affected much more by global industry than the yellow metal. Lately, silver has indeed behaved more like an industrial metal, tracking closely with copper prices.

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The same is true for palladium. While 42% of platinum demand comes from jewelry and investment purposes, a mere 5% of palladium purchases fall into this category. The rest is driven by industrial demand. Although catalytic converters often include both metals, palladium is the preferred component: 72% of the world’s palladium supply is used in automobiles.

Platinum-Palladium Ratio

Perhaps because of its significant demand component from investors, platinum prices have consistently enjoyed a premium over their PGM counterpart. In fact, it’s only been the past few years that platinum has slipped behind the price level for gold.

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Periodictableru (Own work) [CC BY 3.0], via Wikimedia Commons

For a period fro 2015 to the middle of 2016, the ratio of platinum-to-palladium remained high due to a decline in palladium prices. The metal even dropped below $500 per ounce early this year.

Yet, now the platinum-palladium ratio has fallen to fresh lows—the tightest spread between the two metals since 2002. Moreover, they are still tightening: palladium has advanced an impressive 14.2% since the election, while platinum has actually lost about 5%. In this way, platinum’s performance matches closely with gold and silver, while palladium has been climbing all on its own.

What, if anything, does this tell us about the markets and the economy? Generally, rising gold prices would say something about global growth, interest rates, consumer sentiment, investment conditions, etc. The kinds of insights one can glean from palladium’s performance are far more limited in scope. However, the historically low platinum-palladium ratio implies that the markets are taking serious the developed world’s commitment to better emissions standards for cars. If indeed auto manufacturers work toward these lower emissions targets, we should see more palladium used in automobiles.

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Also, this tells us something about what the markets expect from President-elect Trump. Despite his suggestions of gutting the Environmental Protection Agency (EPA) and his recalcitrance toward multilateral international agreements that may hamper the U.S. economy, it seems the palladium market is confident that Trump won’t impede the march toward more environmentally-friendly cars. Though this is hardly a certainty, remember that markets are usually more accurate in their forecasts than the polls!

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.