Forget Gold or Silver. This Precious Metal is Extremely Undervalued

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As of Oct. 27, gold spot prices were hovering around $1,747 per ounce. Platinum, on the other hand, was selling for about $1,636 an ounce.
 
This means it takes just 0.93 ounces of gold to buy an ounce of platinum. Or, from another perspective, you could trade in one ounce of gold for 1.07 ounces of platinum.

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 throughout the years. Platinum almost always has the upper hand over gold, in terms of price. 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 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 couple months. It's not so much because platinum prices have nosedived (they're down about 9% for the year), but rather because gold is in the 11th year of a bull market and continues to soar. Prices have climbed another 25% since the start of the year.

On Jan. 1, 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...

As you can see from the chart below, we've been in unprecedented territory.


 
Platinum has traded about 64% above gold on average during the past decade. Based on this, and with gold at $1,747 an ounce, you might expect platinum to have surged above $2,800 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. Speculators might consider this an opportune time to enter a pair trade by going long platinum and short gold. This would remove any outside influences and just capture the performance of one metal against the other.

This strategy has a high probability of success because 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.

Action to Take -->
Platinum group metals (PGMs) are irreplaceable and will remain in high demand. Auto production is expected to rise, which should boost demand. There are looming strike threats in South Africa, home to 80% of the world's supply. As my colleague David Sterman recently pointed out , the world's other major producer, Russia, has warned that output will begin falling.

You won't find any publicly-traded U.S. platinum companies. But First Trust has conveniently packaged all of the world's top suppliers in one place. For a modest annual cost of just 0.70%, the First Trust ISE Global Platinum fund (Nasdaq: PLTM ) offers a diverse global basket of 24 major producers, including well-positioned leaders such as Impala Platinum and Anglo Platinum.

The exchange-traded fund ( ETF ) was punished during the selloff and was down nearly 50% for the year before a strong rally in October. But I still think this in an opportune entry point for long-term investors.


-- Nathan Slaughter

P.S. -- In a world of crooked politicians, paper money and ballooning government debt, investors need real, tangible value. Gold, commodities, energy, and other natural resources are in short supply, yet worldwide demand is exploding, making these rare assets some of the best investments on Earth. For more on how you can profit from the global scarcity trend, watch my special presentation "The 9 Best Stocks to Own For the Next Decade."

Disclosure: Neither Nathan Slaughter nor StreetAuthority, LLC hold positions in any securities mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , ETFs , Investing Ideas

Referenced Stocks: ETF , PLTM

Nathan Slaughter

Nathan Slaughter

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