How gold caught up with platinum

Gold is accessible to the common man, but platinum is way beyond reach.

If that is the common impression, it is time to change it. Surging 40 per cent in the last one year, gold has already caught up in absolute price, with the rarer precious metal — platinum.

In fact, for a brief period last week, you could have bought platinum at a price cheaper than gold. In rupee terms, platinum now trades at about Rs 27,460/10 grams, barely Rs 300 higher than 24 carat gold (at Rs 27,160).

Narrowing price differential

The phenomenon of gold prices trading neck and neck with platinum is rare and has occurred only twice in the last 20 years.

On an average, platinum has traded at one-and-a-half times the price of gold in the last five years (the ratio was as high as 2 times in 2008). However, the differential began to narrow dramatically since the beginning of 2011.

The recent parity between gold and platinum prices has some market watchers recommending that investors buy platinum, as the ratio between the two metals will eventually revert to mean.

“Platinum is trading at a discount to gold for the first time in 20 years. Buying platinum and selling gold is a good strategy for the short term,” says Mr Dharmesh Bhatia, Associate Vice-President, Kotak Commodities, predicting that the platinum-gold ‘spread' (difference in prices) could go as high as $230/ounce if platinum manages a rebound.

‘New normal'

However, others believe that higher gold prices are the ‘new normal', as the factors driving gold demand are unique.

Ms Lakshmi Iyer, Head of Products at Kotak Mutual Fund, says: “With central bankers resorting to pump-priming their economies by printing currency, there is a general lack of faith in fiat currencies. This has prompted a shift into gold, which cannot be printed out of thin air. Then, you have the classic under-ownership issue. Gold is the least owned asset in global forex reserves. The demand-supply gap in gold has also been growing.”

Different drivers

In fact, the fundamental difference between gold and platinum becomes clear when one looks at where their demand comes from. Around 61 per cent of the global demand for platinum came from the automotive and industrial sectors (glass, electronics and chemicals) in 2010.

In contrast, only 12 per cent of the gold demand originated from industrial users, with jewellery making up half the demand.

Safe haven

Now, economic worries in the developed world have depressed the outlook for industrial growth and dented platinum prices. But, gold has been supported by soaring jewellery demand from India and China.

With its spectacular returns and the safe-haven factor, gold has also attracted much more investor interest than platinum.

While ‘investments' through exchange traded funds and other vehicles today make up nearly 40 per cent of the annual gold purchases, similar investments account for just 7-8 per cent of global platinum purchases.

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