Some time ago my text “Platinum strongly undervalued in relation to other metals” appeared on website comparic.pl. I analyzed the retios of precious metals’ prices to each other, putting the greatest emphasis on platinum which price seemed to be exceptionally attractive then.
One of the indicators of this attractiveness was xptxpd ratio, i.e. relation of platinum and palladium prices which amounted 0,93774 then. I pointed out that xptxpd was so low previously only once in history – from December 1999 till September 2001. Almost 9 months after that release the situation seems to be even more uncommon and interesting. Currently, xptxpd ratio amounts 0.574 (according to the closing prices of February 12) due to price of palladium has been growing almost constantly and the price of platinum has been falling lower and lower for the last nine months. This is within an ace of the historical record reached in February 2001 which amounted 0.558 (platinum price was USD 603.70 per ounce, and palladium USD 1082,80 per ounce).
And here is one note! I prepared this post yesterday evening. Few minutes ago when I was trying to post this article, I felt forced to change the title and add the update, because the record described above was beaten. Now, ie. February 14 at 10:57, according to intraday prices, platinum:palladium ratio is quoted 0.557!
One could ask the question why I’m so interested in these two precious metals’ prices ratio. Well, as I’ve already written in the context of divergence of cereals’ prices, it seems that uncommon behaves on markets, e.g. when strongly correlated prices start to move in opposite directions, become an investment opportunities. I believe it can be assumed the market strive to achieve a balance like long-term average/median – generally speaking, the state recorded most of the time.
Platinum and palladium prices are quite strongly correlated. According to data from January 1977 to February 2016, the correlation coefficient had amounted 0.73. Despite the divergence which has been deepening since February 2016, according to data from 1977 to yesterday the same indicator still amounts 0.65.
As it can be seen in the chart, increasing difference between prices is result of palladium price boom which has been lasting for 3 years and the fact that platinum price has been stuck by level 800 USD per ounce which is level of prices from early 2000s for almost a year. Palladium price beats another historical records almost every week (closing price from February 12, equal $ 1355.40 per ounce was another one), leaving the price hike which I wrote about few month ago, far behind. In the same time platinum quoted 789.6 USD per ounce. That means a 65% drop from the historical record of USD 2,273 per ounce.
The fundamental data is inexorable in these cases – a strong demand for palladium and a shortage of raw material recorded for several years pushes prices up. Reversely, oversupply on the platinum market, declining demand from the car industry and losing value by South African Rand are factors which make platinum price lower.
However, it is worth to remember that the sentiment on these markets had already reversed several times in history. Let me recall some excerpts from the article on comparic.pl which I mentioned at the beginning.
Looking at the xptxpd ratio over the last 30 years, there is a noticeable cyclicality. At the end of 1990, platinum was valued five times higher than palladium. Then it had lost gradually for the next decade. In extreme case (in February 2001) platinum price was just over half of palladium one. (…) This situation was caused not only by the strong expansion of the car industry and the growing demand for palladium as a component of catalysts for gasoline engines, or linking palladium with the technology market, which experienced its “5 minutes” then. The main cause was disruptions of the palladium supply by the largest producer, i.e. Russia. The palladium market is a small and poorly diversified on the production side one, so it’s prone to speculation or volatility.
After September 2001, the palladium price dropped as quickly as it had grown earlier, thus platinum had been gaining again, until 2009 (also almost a decade). The period of boom in the markets and economic expansion translated into increased production of diesel cars, especially in Europe due to favorable tax solutions. In addition, when platinum was very cheap in comparison to palladium it started to be used in a wider scope in various industries, in gasoline engines as well (substitutability of these two metals is relatively high, although it requires changes in the production technology, so it can’t be executed very fast). Therefore, platinum became a darling of the investors again. (…) at the end of February 2009 the price of platinum was more than 5.5 times higher than the price of palladium. Such high premium was recorded previously only in 1981 and 1982.
And that’s where the question about future moves of these metals come to my mind. To put it another way, what would be the “right” xptxpd ratio which market should strive to. There is no simple answer to this question, of course. Prices of every commodities are strongly related to demand, supply and coverage of total demand for the production. This is obvious. Currently, these factors are unfavorable for platinum and very favorable for palladium. However, the history of these two metals’ prices shows that the same factors, in the long term, may start to impact quite the opposite. In addition, platinum has already been weakening against palladium for about a decade.
Hence it seems to be legitimate to searching for a moment when it would be possible to open a hedged position – long on platinum and short on palladium, especially with the assumption of a relatively strong correlation between the prices of these commodities in the long term.