• 14 hours Why The Gold Rally Flatlined
  • 20 hours The Uranium Sector Can’t Catch A Break
  • 2 days Upcoming Fed Meeting Has Investors On Edge
  • 2 days Global Gold Sector Outlines Responsible Mining Principles
  • 3 days China’s Giant Vampire Fund Loses $120B
  • 3 days McDonalds To Roll Out Robot Drive-Thru Clerks
  • 3 days Savvy Investors Are Betting Big On This Little Data Company
  • 4 days How The Government Is Wasting Tax Money This Year
  • 4 days Supply Concerns Halt Expansion On Tianqi Lithium Plant
  • 4 days The World’s Biggest IPO Is Almost Here
  • 5 days The Relatively Of Money And Happiness
  • 5 days Wall Street Unfazed By Recession Fears
  • 5 days SoftBank Urges WeWork To Pause IPO Plans
  • 6 days Anti-Aging Market To Hit $55 Billion
  • 6 days JPM, Morgan Stanley Take Advisory Roles In Aramco IPO
  • 6 days Are Bonds In A Bubble?
  • 7 days The Unknown Media Giant Taking The World By Storm
  • 7 days From Millennial To Millionaire With One Simple Trick
  • 8 days The 5 Most Expensive Art Pieces Ever Sold
  • 8 days Are Gold Stocks Overbought?
The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

Billionaires Are Pushing Art To New Limits

Billionaires Are Pushing Art To New Limits

Welcome to Art Basel: The…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Mining.com

Mining.com

Mining.com

MINING.com is a web-based global mining publication focusing on news and commentary about mining and mineral exploration. The site is a one-stop-shop for mining industry…

Contact Author

  1. Home
  2. Markets
  3. Other

Compared To Silver And Platinum, Gold Is Getting Really Expensive

No one I know, including myself, can predict with great accuracy the day-to-day direction of any investment. However you can go to the chat board of any investment and most of the people there feel they and they alone know what gold or silver or the Dow is going to do tomorrow. When on occasion they manage to get it right they sprain their arms patting themselves on the back. But if two people are tossing a quarter and one chooses heads and the other tails, one of them will get it right. Markets pretty much can only go up or down, they rarely stay the same.

Due to the friction caused by commissions and the spread between bid and ask, you not only have to be right to make money, you have to be pretty right. A 5% move in the right direction may be necessary to break even.

There are alternative investments where you don't have to bet on direction to profit. I cover two of them in my bestselling book on Amazon, Nobody Knows Anything.

One is a platinum/gold spread and the other is a silver/gold spread. You don't have to guess and after all, that is all we are ever doing when investing, we guess what direction an investment will go in next. You can use historical data to determine the range of an investment in the past and presume the future will be similar.

There are relationships behind all sorts of commodities. For some reason sugar and silver tend to make tops and bottoms together. I won't ever wonder why, they just do. Others are more logical. If you read that Cheerios have doubled in price, you can safely suggest that Wheaties probably will also move up. Whatever affects Cheerios will usually affect Wheaties.

Gold is a precious metal, as is platinum. Over the past several hundred years, for a variety of reason platinum has almost always carried a premium to gold. It's scarcer and costs more to produce than gold. But since 2015 the spread between platinum and gold has gone negative three times with platinum going higher than a $340 discount to gold three times.

(Click to enlarge)

In all of history platinum has never gone to a greater discount to gold than about $350 for a few minutes. It is now possible to do a platinum/gold spread on the CME. Maintenance margin is $3060. The contract is for 100 ounces of gold vs. 100 ounces of platinum. A $10 move is worth $1000. Since platinum has never gone to a greater discount to gold than it is right now, it's a pretty conservative bet. In the two previous cases since 2015 where the spread touched $340, in the first case, the spread decreased to minus $160 and the second time it decreased to minus $200. You can be invested in precious metals without having to guess direction. You want to be long platinum and short gold. Who cares what the price should either be? You only care that the high price for gold relative to platinum will decrease.

The other interesting spread is the ratio between silver and gold. How many ounces of silver does it take to buy one ounce of gold? Over the past 100 years or so, the ratio has varied between 17-1 and 100-1 while averaging 53-1. When I wrote Nobody Knows Anything, the ratio was 84-1, which was a really safe spot to invest. In the past ten years the ratio has varied between about 85-1 and 32-1. During the last two years the ratio has been as high as 84-1 and as low as 65-1.

(Click to enlarge)

Again the CME has futures contracts where you can trade the ratio. Maintenance margin is a tiny $1450.

According to Tom McClellan, the silver/gold ratio going over 72 is an indication of stress in the financial system. So while the platinum/gold spread makes platinum look cheap, the silver/gold ratio has gone from 68-1 to 75-1 in the last month. There is nothing saying the silver/gold ratio might not go to 85-1 or even 100-1 in the financial crisis we all know is coming one day soon.

Nobody knows what the "right" price is for gold or silver or platinum regardless of all the pundits who claim they and they alone are correct. But you can use history as a guide to determine a safe point at which to invest. Right now gold is more expensive than it has ever been relative to platinum and pretty damned expensive relative to silver. Who knows if the metals will go up or down? But you can make money understanding and betting on past history and still be pretty conservative.

Investing is not rocket science if you understand the basics and use some common sense. There are no gurus.

By The Gold Report via Mining.com

Back to homepage

Leave a comment

Leave a comment