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A case for the 'white precious metals'

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The precious metal recovery in January last year was led by gold, with the white precious metals – especially silver and platinum – following reluctantly. The idea of a more sluggish growth in China translated into expectations of lower demand for industrial metals. In January 2016, copper quoted at a decade low. 

It is most common to compare gold to any other precious metal through e.g. a Gold-to-Silver, or Gold-to-Platinum ratio. This tells you how many ounces of the second precious metal one ounce of gold would buy.

Short synopsis (Statistical data over 2016 with Dec 30 values; prices in USD/Oz)

Statistical Info 2016
Item Au:Ag Au:Pt Au:Pd Au Ag Pt Pd
Value on Dec 30 71.37 1.278 1.715 1159.1 16.24 907 676
Max 83.70 1.365 2.527 1370 20.71 1182 774
Min 65.41 1.144 1.512 1062.25 13.58 814 465
Range (%) 27.9% 19.3% 67.1% 29.0% 52.5% 45.2% 66.5%
Up from Min 9.1% 11.7% 13.4% 9.1% 19.6% 11.4% 45.4%
Down from Max -14.7% -6.4% -32.1% -15.4% -21.6% -23.3% -12.7%

Gold is up the least from its 2016 low (minimum), yet its yearly price range also is the smaller as gold has the less volatile price among the four precious metals. Palladium is up the most from its 2016 low, moreover it is down the least from its yearly price high. Platinum is down most from its (August) high, while it is up only 11.4% from its $814 abysmal January low.

Some interpretation on the ratio’s: the higher the range (%), the poorer the correlation to gold. If a metal trades in lock-step with gold, the ratio remains stable. E.g. price of a gold bullion ETF relative to the London daily fix. Palladium is the least correlated with gold.  The maximum ratio is when the metal was at its weakest relative to gold.
The more the 30 Dec value is down from the maximum, the stronger the metal price is.  The minimum of the ratio is when the metal was at its strongest relative to gold; the more a ratio is up from its minimum, the more the metal has slid back from its relative high on Dec 30.

*** Graphs using LME daily fix data; last updated on Jan 04, 2017 ***

Silver on a challenging recovery pathIf gold has been selling off badly into December 2015, the silver slide was horrendous. As a result, the Gold-to-Silver ratio (GSR) has risen. Throughout most of 2015, the GSR had been moving sideways, but by the end of the year, silver once more weakened relative to gold to a ratio over 80:1. Gold bottomed out early December 2015, setting higher lows as the initial recoveries failed. Meanwhile the ‘white’ precious metals continued weakening until after mid January. Initially the silver recovery was quite meek, unable to catch up with gold. The GSR continued trending higher peaking on leap day. Eventually it took until early April for silver to start outperforming gold, which was trending sideways by then.

Silver fix in pale (LME in USD/oz) on the left scale and gold-to-silver ratio (GSR) in blue on the right scale
(click to enlarge)

The GSR crept back up as the precious recovery hesitated early May. It took till mid July for the GSR to bottom at 66, with silver peaking at $20.71. As precious metals weakened during autumn, silver once more was hit harder and the GSR bounced up to 73 in November. It was still at 71.7 when silver eventually bottomed at $15.77 before XMas.  The turn-around may not be conclusive yet.  However, silver still is structurally undervalued relative to gold to an extent which only is justified if the sluggish growth outlook for the Asian industries slashes global silver demand over the longer time frame.  But that catastrophe scenario of late 2008, expecting the complete world economy to come to a grinding halt, is highly improbable.

Historic overview

We start off in 2011: As silver is challenging the 1980 all time high, its rapid rise in spring 2011 leaves gold behind, though the yellow metal is itself in an uptrend. Early May 2011 silver drops out of its parabolic rise and the gold to silver ratio (GSR) abruptly jumps up from a low at 31.4 (Apr 27) to a high at 45 (May 12) in only two weeks time. As gold makes its all time high with a double top in August/September 2011, silver has been climbing out of its June 2011 low to about $43/Oz. The GSR holds firm near 45. Yet the gold sell-off later in autumn 2011 is detrimental for silver also. The white metal drops to near $28 as gold sells off to $1615, making the GSR jump abruptly to over 57 as early as Sept 26, 2011. An ounce of gold buys over 80% more silver than it did 5 odd months earlier! Silver being called “gold on steroids” indeed seems to have a whim of truth in it. During the gold spring rally, silver outpaces gold once more, making the GSR fall to 48 on Feb 29, 2012. Leap day also means the end of that rally. Again over 2013 we clearly distinguish the late June gold sell-off, whereby silver once again leverages gold to the down-side. GSR peaks above 66 on June 27, 2013 and further increases up to about 75 by late 2014.

The supply equation

It is generally known that as much as 75% of the silver mined is produced as a secondary output stream from other non-ferro metal miners.  Silver most often is found either in combination with lead, zinc and tin or else combined with copper.  Their production is little or not sensitive to the silver price and they will continue producing while they have off-take for their primary copper or lead.  Most often, non-ferro miners have hedged their silver output or have sold the stream against investment financing. In the latter case they are selling silver at marginal production cost.  [There also are several gold miners having a silver secondary output stream, yet their contribution is far smaller than the former ones.]
The ‘swing producers’ with a more substantial revenue from silver mining, have a harder time. Those having hedged part of their production volume at better prices, may still thrive.
Since there is no firm price-constraint for silver production, this means that a meaningful drop in industrial demand may prolong the protracted downtrend of the silver price. At the other hand it also implies that increased industrial demand and higher silver prices are not readily met with any significant increase of mine production. Only the ‘swing producers’ may crank up production if feasible.

Another point worth considering is the impact of closure of any zinc or copper mine with a secondary silver production. Global non-ferro metal production no longer is growing. This may cause an unexpected constraint on global silver production. 

Platinum: worsening of the outlookPlatinum is our next focus. The Gold to Platinum ratio (GPR) has been discussed on a very long time frame in a previous blog post: Platinum group metals: a story of scarcity and industrial needs. The long term graph has been updated to include data as of 4 Jan 2017.

We now repeat the above exercise from the beginning of 2011 onward for platinum.

Platinum fix in pale (LME in USD/oz) on the left scale and Gold to Platinum ratio (GPR) in blue on the right scale (click to enlarge)

The above graph shows platinum in USD/Oz on the left scale and the GPR on the right scale. As the sovereign debt crisis escalates in Europe, the economic recovery since 2009 comes to a grinding halt. Stock markets correct and Europe slides in a recession. Especially the automotive industry
(through the catalytic exhaust filters one of the most important consumers of Platinum and Palladium) is having a hard time and cuts its production volume. Several car manufacturers are even closing down plants in Europe. The outlook is most bleak. The slide of the platinum price in autumn 2011 makes the GPR jump abruptly above one. During the financial crisis the GPR briefly touched 1, whereas the GPR had been trending lower before.

Platinum however has little in common with many other industrial commodities, where a weak price causes a demand shift. It is on the contrary the supply side getting deep into trouble. Violent strikes erupted at Lonmin’s Marikana mine in South Afirca, the most important platinum producer. This only made platinum rise temporarily and shortly bring the GPR down to 1. As the crisis cooled down, platinum prices fell back till way into summer 2012: the GPR quoted above 1 for an extended period. It required above ground supplies running low to make platinum recover to $1700 later in 2012.

Despite precious metals selling off in triple selling spree during 2013, nor the April, nor the June nor December dips for gold are matched by platinum dropping lower. On the contrary, the GPR systematically drops below 1 from the second quarter onward. In 2014 the GPR twice tested the 0.85 resistance (on Jan 20 and May 30). Though platinum prices left behind the 2013 support level of around $1320, they had a hard time breaking above $1500/oz.

Deterioration of the Platinum market

The situation deteriorated abruptly since early September 2014. Whereas the USD recovery plays a role in the weakening of raw materials across the board, there is more at hand for platinum. A new recession in many European economies was worsening the demand outlook from the car industry. At the same time, platinum is selling off in tandem with palladium. However palladium has reached a twelve year high in August 2014, whereas platinum never even came near its $2270 top level, dating from March 2008.

Gold to Platinum ratio over 30 months: the almost continuous platinum slide is far worse than that of gold

The November 2014 platinum slide brought the GPR near one again. Yet, when the GPR peaked above 1.15 in 2012, the platinum price bottomed barely below $1400. During the January 2015 gold recovery, platinum was unable to keep pace with the rising price of the yellow metal. The GPR broke above 1 by mid January 2015. Any gold sell-off has well been matched by further weakening of Platinum, sliding to ever lower multi-year bottoms: the July 2015 slide brought platinum back to triple digit prices in USD.  The platinum outlook further deteriorated as a result of VW tampering Diesel engine exhaust data.  Only platinum can be used as in catalytic convertors for Diesel engines, whereas palladium is generally preferred for regular gasoline engines.  On Sept 29, 2015 Platinum first dipped below $900 intraday.  This abrupt plunge of platinum results from a short platinum//long palladium speculative trade. The unwinding of that trade only brought temporary relief.

Ultimately the GPR peaked at 1.3445 on Jan 21, 2016 with platinum at a $814 bear market low, before starting its recovery. Since gold simultaneously is strengthening, this didn’t bring about a significant recovery of the GPR. On Feb 29 the GPR even made a second peak at 1.3426 as platinum initially kept lagging gold during its uptrend. By March 4, the GPR stood at 1.268 while platinum is quoting near $1000/Oz. After peaking above $1170 with the GPR down to 1.15 early August 2016, Platinum once more proved unable to lock in its relative advance to gold. During the gold correction, platinum slid deeper, with the GPR peaking at 1.365 during the Pt plunge. Because of the concurrent Palladium strength, the Pt-Pd price gap dropped towards an unusually low $200/Oz. Eventually Platinum briefly breached the $900 resistance level. Now it is strengthening again, but with a PGR at 1.23, conditions still are dire.

Supply – demand balance

Platinum prices are far too low for production to be profitable in most of the South African mines (by far the largest platinum producer world-wide). Revenues may suffice to pay for current expenses and personnel costs, they don’t allow the capital expenditure needed to sustain platinum production at its current level. Adding ore reserves to assure the production level for some years to come is out of the question. With a world-wide production short of 200 tonnes (less than 8% of the yearly gold production), platinum is an extremely tiny market. Unlike gold, for which the above ground supply meets yearly consumption many times over, the supply of refined platinum only covers the industrial demand for several weeks to a few months.

During the strike at Lonmin’s Marikana mine, processing of a stockpile of ore could make the company meet its delivery obligations. It is unsure whether Lonmin yet managed to rebuild inventory to cope with any possible interruption of ore supply.

The current demand for platinum is in excess of 250 tonnes per year, of which the car industry consumes about 120 tonnes. The yearly shortfall needs to come from platinum recycling, mainly from spent catalytic convertors. Palladium/Platinum recycling is a more profitable business than mining. Companies involved are Johnson Matthey and Umicore.

Palladium recovering after a short sell-off from recent high

The last metal in the row is palladium. This metal has many properties in common with platinum. Its main use is in catalytic exhaust filters for gasoline engines. Palladium is less used in electronics than is platinum. The metal often is found in conjunction with platinum.

The price of palladium nearly always has been lower than that of platinum, but it does vary quite a lot. Until the 1990′s, Russia had a stockpile of palladium, coming from the Norilsk nickel mine. As that supply got nearly exhausted, there has been a speculative surge of palladium to above $1000/oz early in 2000. Palladium dropped back to below $200/oz during the 2002-03 economic crisis. A history in brief, but we now focus on 2011-16 as we did for the other precious metals.

Palladium fix in pale (LME in USD/oz) on the left scale and Gold to Palladium ratio (GPdR) in blue on the right scale (click to enlarge)

The profile of the graph is somehow similar to that of platinum. The gold to palladium ratio (GPdR) starts off quite low (high Pd prices) in 2011 and like platinum the price of palladium also heavily suffers during the sovereign debt crisis and the stock market correction in 2011. Palladium lagged as gold made its all time high and then fell off a cliff as the yellow metal retreated in autumn 2011. From below 1.75 the GPdR approached 3 as Pd bottomed near $550/oz. Palladium weakness lingered on a while longer than did platinum. In autumn 2012 the GPdR still stood around 2.75. After palladium started rallying by towards the end of that year, its price level remained remarkably resilient during 2013 as gold plummeted in three sell-off waves.

Worsening of the economic outlook – mainly because most of Europe entering another recession - has driven palladium prices down from previous highs. Most of the 2014 gains were wiped out in less than two months. However, unlike platinum, palladium prices remained materially stronger than where they had been lingering for over a year. Moreover, palladium kept up better than other precious metals during the 2014 December slump. Palladium seemed to pay the price for its running ahead of the pack: it entered into a counter-trend slide while gold strengthened around mid January 2015. Yet, in a tight market, there was little reason for this slide to persist. We indeed witnessed Palladium strengthening with gold giving way below its $1180 support. Mid March 2015, the GPdR again dropped below 1.5. 

The speculators’ take on the exhaust data falsifications by VW has been to short platinum (the only metal used in catalytic converters for Diesel engines) and go long palladium (the metal used in the catalytic converters for regular gasoline engines). As a result, the prices of both metals have diverged to an extent not witnessed in the 21st century. It is however clear that such speculative trade needed to be unwound, which proved a temporary set-back for palladium. 
There have been more recent similar disclosures by other car manufacturers worldwide. Palladium remarkably strengthened during the autumn 2016 precious metals sell-off eventually peaking at $770 fresh 12m high on Dec 1, with the GPdR back down to 1.51. That triggered a short but violent sell-off, with Pd shedding over $100/Oz to $654 before XMas. By now Pd recovers to $730 with the GPdR again at 1.59.

Palladium versus Platinum

Palladium is almost exclusively used in the catalytic converters used in regular gasoline engines. It can be replaced by platinum. Yet while platinum remains much more expensive than palladium, this is unlikely to occur. At the other hand, replacing platinum by palladium in industrial catalytic processes is out of the question. 

The superior qualities of platinum in terms of wear- and heat resistance, hardness and chemical stability makes this metal the unique material of choice in many applications.


Despite the repeated gold sell-off from September 2014 onward, the yellow metal is down less than are silver or platinum. The silver slide is the succession of a lengthy period of silver structurally lagging gold. The GSR now lingers on around 71, well below its five year high at 83.7.
Platinum and palladium have been diverging:  while platinum has been making long term lows, palladium sold off from a more than twelve year high. 
After Palladium made a fresh 12 months high on Dec 1, 2016, the GPdR still quotes materially higher than it did three years ago.
Palladium clearly has shown the way. Both other white metals still need to follow in its footsteps. 

Further reading
In August 2014, a first blog article was dedicated on this subject:
as the precious metals slump and the peculiar silver plunge persevered in October 2014, it was necessary to extend the point of view:
By end September 2015, we witnessed another washout after a failed summer rally, with silver and platinum being the usual victims in the race to the bottom of precious metals:
Finally, after the onset of last year’s gold recovery (March 11, 2016), it was useful to repeat the exercise:


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