Relative Value -- Part One

Over the past week or so I have been busy, but I have been thinking about a few subjects that could mostly be lumped together as a topic I call "Relative Value".  After some brief comments on our bearings (very valuable), I will examine relative values of the precious metals with each other.  I will look at other items of "relative value" in the near future, so this is the start of a short series of related articles.

Certainly for me, rolling bearings that we sell in Peru are of great value, it is our principal way of adding value to our world, and hence making money for doing so.  We add value to Peru's automotive spare parts market, our customer pay us for the pieces rather than paying our competitors.

Just today (Saturday) our Collections Director Raul told me that our sales of Chinese bearings and hub & bearing assemblies are still strong.  And we have Korean bearings that will arrive later in August that will help sales a lot as well, including our best selling piece (the 6007-RS for Daewoo Tico).

So for us, objects made of  "52100 steel" (bearing steel) are precious, metal products of high relative value to us..., practically precious!  But, in our case, steel bearings are actually producing an income (precious metals just sit there), a stream of wealth, and that surely has value...  Not the same kind of value as gold, not even really "relative to gold", our bearings (and bearing business) represent more a different class of value.

***

And of course, physical precious metals have a very high relative value compared to almost anything else.  The below picture is in honor of two people I do not even know, but it is a celebration (a 50th Anniversary!).

"Little Gold"

The photo shows US 1/4 oz and 1/10 oz Gold Eagles on the left, a 1/4 oz Krugerrand in the center and 1/4 oz and 1/10 oz Canadian Maples on the right.  My picture is not perfect, but you may be able to notice color differences between some of the coins (the angle of my photo influence the colors as well).  The Krugerrand in the middle shows a slightly rose color because the K-rand is 91.67% gold, the balance is copper, the copper making it slightly more pinkish than the others.  The American coins are also 91.67% gold, but the coins are alloyed with 3% silver (balance is copper), so the coins are not as reddish as the K-rand.  The Canadian gold on the right is all 99.9% percent gold, and is also polished up more finely than the American, and so has a brighter more clearly "gold-shine", although that is not obvious in the picture.

For me, "Little Gold" (small gold coins) have a value that is beyond their actual bullion value of, say, 1/10 oz in their smaller size.  The smaller sizes, of course, sell at a higher premium as the costs of minting them are relatively higher.  Smaller sizes have real value to me, they would be good for smaller transactions if it ever comes down to having to part with my gold...  Why would smaller gold pieces (1/10 oz) have value to me?  Because their value is approximately the "geometric mean" between the 1 oz Silver Eagle and the 1 oz Gold Eagle, meaning that the value of a 1/10 oz gold coin is "halfway between" the other two...:

(ln($23.25) equals about 3.1, ln($138) equals about 4.9 and ln($1375) equals about 7.2)

And the concept of "Relative Value" here?  Since I already have 1 oz coins, the relative value, to me, of 4 pieces of 1/4 oz coins is a little higher!  Much more flexible in making purchases (should it come to that) or for gifts (hah!  Don't hold your breaths...).

Would it ever become hard to sell gold?  No, I think not.  "There is always someone around who will accept your gold."

***

A topic that recently  has gotten even more attention than it normally does is the relative value of gold vs. silver.  This is most often looked at by the Gold-to-Silver Ratio (Au:Ag or "GSR").  The GSR is used by many traders of precious metals to try to identify which is overvalued (or undervalued) among the two.

Through history, the GSR has been relatively stable (more so than in the charts below).  Typically the GSR has mostly been in the range of 12:1 or 16:1.  This probably reflects the relative mine-able abundance of gold and silver in the earth's crust.  I have read, however, that in ancient history (Egypt) that the ratio was 1:1 (silver had the same price as gold!).

Here is a chart showing this ratio over recent months (as always, *click* on any image for a better view).  Please also note that all of these charts are for "paper gold", I would bet that once you (well, maybe not YOU, but me neither...) are at the level of trading for say, 100 metric tones of gold, that you would pay far, far more...  But these charts do give a fair representation of the relative values of the precious metals at present.

The chart has been very spiky over the last months, most notably during the time of the gold & silver price crashes in April and in June (and of course now in August).  I would attribute the decline in the GSR in August (so far) to the recent outperformance of the price of silver.  Gold has gone up to be sure, but silver has gone up faster.

This next chart shows the same GSR, but for almost three years:

There are a LOT of interesting things to note in the chart just above.  First would be the remarkable nine month or so plunge in the GSR from late 2010 to May, 2011.  This was when the price of silver shot to almost $50.  Of interest to me is that during April of 2011 was when I did my only "trade" of precious metals, I turned in a bunch of silver for a much smaller amount of gold.  On the day I traded it in, the GSR was about 36:1, so I was lucky...

Silver is notorious for being volatile, for that it is sometimes called "The Devil's Metal"...

That same chart shows the GSR 200-week moving average to be pretty steady at around 58:1 or so over the past three years.  Does this 58:1 ratio represent a fair relative value between gold and silver?  My best guess is that yes, for the short-term it may very well (please note that my prediction record is poor, so I "guess" now...).

But, the more important question is what the future GSR ratio will likely be.  Is gold a better "relative value" than silver?  My "guess" is yes it is.  The line I have trotted out before is that FOFOA is likely to be right in the end, that gold, and only gold, will have its big revaluation because of a likely default in delivery among the very top holders of gold.  Similarly, the world's central banks hold gold alone of the precious metals.

I have also recently come to believe that silver has become mostly "demonetized" (demonized?).  By this I mean that silver is less looked at "as money" compared to the past.  Those of us old enough to remember US coinage from 1964 and earlier can remember when silver dimes and silver quarters were what we got as change back from a dollar!  This almost seems absurd now, even though the US Constitution mandated that our coinage be gold and silver (the bimetallic standard was arguably a mistake, but that is for another time...).  "They" were successful and did it: demonetized silver.  So even though silver is scarce (above ground stock of silver is less than the 15:1 or so historical average) AND that silver is the commodity that is used in more applications than any other (except oil), my bet is more on Au than Ag...

One other thing about silver being less than ideal in times of financial distress.  One of FOFOA's most serious followers lived through a hyperinflation.  He reports that at no time was silver a commonly bartered item.  People wanted cash!  But they wanted the cash fast, and then wanted to spend it fast!  I need to check back, but I believe that gold was often taken in barter, as I mentioned above, there is always someone around who will take your gold...  I will take gold for almost any payment...  ;)

Also, from a limited experience of my own with hyperinflation (as a visitor to Peru during a hyperinflation of theirs), in Peru in those days, I never saw silver being exchanged as a payment mechanism, neither by a buyer offering to pay in silver nor a seller asking for silver.  Even with a hyperinflating currency, Peruvians wanted CASH!

And so, at the risk of antagonizing fans of silver, I conclude that gold is a better relative value to me, in my circumstances and at this time.  Of course, I could be wrong, so I also own some silver.  The silver I now hold is really for a TEOTWAWKI.

And what would I "guess" will be a likely GSR ratio in the future?  200:1!

***

Since this article is about relative value of precious metals, I present two more charts showing more relative values.  This first one is Gold to Platinum (Au:Pt) from late 2010 through 2013 to date.  Through time, platinum has typically had a premium averaging around, say, 20% to gold.  Will that continue into the future?  Platinum is some 30 times rarer than gold, and has many more industrial uses...  Again, my "guess" is no...

Gold has been trending back down to its "normal" (historically normal) relative value of around 0.80 - 0.85 to the price of Pt.  Will Au: Pt ever go to, say, 20:1 (as more-or-less predicted by FOFOA)?  That is a harder for for me, but my guess is that gold will indeed outrun platinum by a considerable margin.  Why?  Pt shares two important characteristics with silver: it is not money (never really was monetized in the first place) and it is used in industry.  Could platinum have a huge reset?  Hey, anything is possible, especially considering how rare Pt is (and where it comes from: risky places like South Africa and Russia).

And palladium (platinum's little sister)?  Palladium has had an almost unbelievable volatile ride since just before the financial crash in 2008 (and so will not show in the chart below).  Pd rose to over $1000 per oz when Ford loaded up on it thinking that was to be their catalyst of choice (for their catalytic converters to reduce air pollution).  That is reported to have cost Ford some $2 billion...  This chart is again a weekly chart for the period of late 2010 - 2013.  Note how all three charts look a different!  I wonder how much of these different price movements represent "fundamentals" (mine supply, new applications) vs. traders' actions...

Palladium has had a very good run over the past several months, that is why the Au:Pd ratio has been declining.  Pd is an interesting metal (that I have discussed before), but it is almost all used in industry of one sort or another.  Some Pd is used in white gold, and some more is used in jewelry in China to replace platinum.

While I think that gold once again is the best choice for the longer-term, I can have no objection to diversifying into platinum or even palladium (but I would get gold and silver first, especially gold).

Diversification In Precious Metals

Long-time readers of my blog knew this one would eventually come...  While I still have not written a piece on Silver (I have long felt that I could draft someone else to do a "Guest Post" on silver...), I include a discussion here, as the dynamics of holding silver are different than holding gold.  And both platinum and palladium have their own dynamics as well.

I use the acronym "PMs" often in this article, short for "precious metals".

"Gold is the money of Kings
Silver is the money of Merchants (Gentlemen)
Copper (Barter) is the money of Peasants
Debt is the money of Slaves"

- "Traditional" (I did a quick Google search and could not find the origin of this saying, "Traditional" found here: http://corp.adjutant.com/about/favorite-quotes)


**********


An Extremely Brief History of Precious Metals Monetization in the USA

1)  The US Constitution says that money was to be ONLY silver and gold.

2)  They took away our gold in 1933 (Roosevelt's confiscation).

3)  They took away our silver in 1965 (clad dimes and quarters).

4)  They even took away our copper in 1982 (new pennies are mostly zinc).

5)  Will they take away our money in the banks soon (see Cyprus)?


**********


An interesting forum-style website covering ALL precious metals is pmbug:

http://www.pmbug.com/

Gold and silver are also much discussed at the famous Zero Hedge website (which talks about almost all things financial as well):

http://www.zerohedge.com/


**********


Gold

Gold has been considered the wealth-preserver of choice for some 6000 years.  Most gold is hoarded, relatively little of it circulates (even back in the days of gold coins as "money", gold did not circulate much).  Because of this primary role of wealth-preservation, gold's highest and best use is sitting very still, held through time, generation-to-generation.

(Re gold and the statement in blue above, I am a follower of FOFOA: fofoa.blogspot.com)

Indeed, gold traditionally HAS been the choice of kings as well as the choice of plunderers for millennia.  Most civilizations valued gold highly (one interesting case that did not were the Incas of South America, who made decorative plates (etc.) out of it, but it was not really hoarded by them, although it WAS called "Tears of the Sun" even by them).

On occasion, LARGE transactions were often transacted in gold.  There is a (an apocryphal?) claim that in Weimar Germany during their hyperinflation that ONE OUNCE of gold bought an apartment building...

Gold is available from 1 gram - 400 oz (troy) sizes.  It is relatively EASY to buy gold coins (Gold Eagles are my choice) in one oz size, but Eagles also come in smaller sizes too (1/2 oz, 1/4 oz and 1/10 oz coins).  Gold Eagles are almost always available at "the largest coin shop in town", the retails price is typically about 6% over spot (6% premium) for Eagles, for certain other gold coins (Krugerrands, Austrian Philharmonics, etc.), the premium is typically less.  LARGE bars of gold (1 kg (31.2 troy ounces) for example) are a little harder to get, especially the 400 oz bars (seen movies...) -- a 400 oz bar would run you some $640,000 now...  One kilo gold bars are typically available at www.tulving.com.  Here is a picture from tulving, showing a typical 1 kilo gold bar: http://www.tulving.com/bullion/kilo_gold_bars_johnson_matthey_jm_kilo_bar.htm

Gold is the only metal stored by the central banks as monetary reserves (most central banks also use US dollars and other currencies as part of their reserves as well).  The central banks and the central bankers may be evil, but they are not stupid...

In my opinion, gold is most suitable for:

-- the already wealthy looking to hold it as a "store of value"
-- those with a long-term horizon (family holdings, to be passed down the generations)
-- those who may want to trade it at some point for other high-valued items (land, fine art)
-- those who might want to transfer a large amount of wealth with them...

Gold is less suitable for:

-- those who cannot afford it (a 1/10th oz Eagle costs about $190, which is not that much)
-- those who plan to "spend it" (for food, etc.) in a SHTF
-- those who do not have children or other heirs they love...

As of the date I write this piece, gold's spot price is about $1605 per ounce.  The price of gold has been range-bound for over a year now, ranging from the mid-$1500s to $1900 per oz.


Silver

The famous economist Milton Friedman has written that silver has been used for money much more often throughout history than gold, indeed his assertion is correct if you define "money" as something that circulates (although the definition of "money" is very slippery, see FOFOA's (very long) blog pieces on money).

One reason why I have not written much about silver is the huge amount of conflicting information about the metal as well as how much the price is manipulated.  In my opinion, there is no question that the price of silver (and gold to a lesser degree, probably...) are manipulated, but how much...?

Silver, it turns out, has a myriad of industrial uses.  I have seen claims that silver is used in more  different industrial applications than any other metal (though usually in very small amounts).  Silver is used (50 lbs worth?) in every Tomahawk missile (and not recycled) as well as iPhones and iPads.  A lot of silver is recycled, but a lot is not.  The fact that a LOT of silver is used by various industries means that its price is influenced by the general economic climate.  "Moar stuff, moar silver is used"

I have seen claims that the amount of the world's above ground (tradeable) inventories of silver are about the same as for gold (about one billion oz each), a claim I cannot verify to my satisfaction (LH!  I need an article from you on silver!!!)

Here is some reading material for those interested in silver (I do not include much information about silver here at my blog, there IS extensive information on gold and platinum here):

http://lhmarketwatch.blogspot.com/

https://silverbulletsilvershield.com/

Silver is also easy to get (although Silver Eagles have been hard to get at certain times since 2008, the US Mint apparently cannot keep up with demand for silver from investors), typically in one ounce coins, there are MANY options, I choose Silver Eagles as they are made in the USA and so well-recognized.

Silver is most suitable for:

-- those who want to buy an ounce for less than $40...
-- spending in a SHTF, yes silver would be better than gold for that
-- those who are betting on silver "running out" (a common theme among silver bulls)
-- fabulous gifts that are not too expensive...
-- speculation..., there WILL be spectacular movements (up & down)
-- protection from germs ("a silver spoon...") and vampires...
-- jewelry (notice how hard it is to find GOLD jewelry nowadays?)

Silver is less suitable for:

-- holding in large quantity (this subjective, I know someone who has 5000 oz...)
-- those who prefer less price volatility...

Silver's price today is about $28.80.  Many consider this price grossly undervalued (a bargain).  The gold price to silver price (Au:Ag ratio) is about 55:1, relatively high by historical standards (this means that were the metals to revert back to their traditional 15:1 ratio often seen in history, that silver would outperform gold, although whether this will happen anytime soon is in much dispute...).

Interested in buying silver...?:  "DYOF Diligence"!


Platinum

Platinum has been recognized as a precious metal now for some 150 years or so (depends on who's counting...).  Platinum is used in diamond mounts (engagement rings, for example) as it is harder than silver or gold.

Platinum is much rarer than gold, there are approximately 10 ounces of gold for every ounce of platinum around the world.

Platinum is also used in industry (as catalysts and in alloys), and so is similar in that respect to silver.  The metal's price shows some of the same industrial demand dynamics as silver does.

Platinum is relatively more suitable for:

-- people who already have decent holdings of other PMs
-- people prepared to pay the price (roughly the price of gold per ounce)
-- those OK with price fluctuation (more volatile than gold)

If you do not have gold and silver, I would recommend starting with those two first.  But, if you are not the kind of person who takes advice from the likes of me, well, owning platinum is better than not owning any PMs at all.

Platinum is harder to get than gold and silver, but if you look around, it is there.  tulving (see above) has platinum coins.  But, not Platinum Eagles, which are VERY HARD to find now (except for "proof coins". which are collectible coins with a high premium over metal value).  Platinum from Canada, Australia and the UK is fairly easy to get.

Platinum is priced around $1580 per ounce, less than gold.  This is relatively rare, historically speaking, the ratio of Pt:Au typically varies from approximately 1:1 (now for example) to 1.3:1 (platinum more expensive).


Palladium

Palladium is the last of the PMs as accepted by most commentators...  Palladium (like gold, silver and platinum) are traded on the COMEX, and palladium is used for some jewelry (esp. in China and as one the accepted alloys for "white gold").  Palladium is also used in industry (like platinum), but in lesser amounts.

Palladium's price volatility is very high (it traded over $1000 / oz before crashing to under $200, wow did Ford Motors lose a LOT ($1 billion) on palladium when the Russians let 'em have it...).  Palladium is also even harder to get than platinum, but too can be found at tulving...

Palladium is now trading about $750 / oz.


Other metals (as investments) and comments

With Cyprus the being the "disaster du jour" lately, I have seen various comments on holding metals that are NOT PMs...

Perhaps the most common are people who are (and have been for over a year now) hoarding NICKELS (5 cent coins).  Nickels are 75% copper and 25% nickel.  The US Mint is likely to STOP making nickels very soon, as they cost some 10 cents to produce (transport of base metals is expensive...).  The metal value of nickels is around 4.9 cents now, lately it has been above and below 5 cents.  Metal value, of course, does not include the expenses of melting nickels to separate the two metals (now currently illegal).

Many people also are culling the copper pennies (1981 and before) pennies that are 95% copper from the modern (1982 on, although some 1982 pennies are copper...) pennies which are some 97% zinc with a copper coating...  The copper pennies are worth (metal value, although ZH-er DCFusor has informed us (at pmbug.com) that "penny alloy" is not considered desirable by recyclers of copper...  Also, is it really worthwhile to spend your time sorting PENNIES?!?!

Metal values of US coins can be checked at www.coinflation.com.


**********


The question probably will arise: "how much of each PM to hold?"  That, kind reader, is up to you!  In the above comments I have discussed suitability in a general sense.  In my own case, here is my $-value percentage holdings of the above PMs (values approximate):

Au:   78%
Ag:     3%    <--- lots of ounces (for "SHTF"), but my gold is worth far more
Pt:    18%    <--- I value platinum's "price density" (value per ounce)
Pd:     1%    <--- token speculative position only

The Mercenary Geologist Writes About Platinum

Mercenary Geologist.com has been kind enough to allow me to be a syndicator of Mickey Fulp's musings on metals and mining topics.  Your congenial host here was a Geology major in college, so these kinds of stories interest me.  Here, Mr. Fulp explores platinum and its price relationships to gold and palladium.

I recently have written an item or two about platinum, but the below piece is a much better perspective on platinum and palladium than I have been able to put together.

Depending on how well you readers accept this article, I may devote more energy to platinum and its related metals.

And now, Mickey Fulp's piece:



A New Price Paradigm for Platinum and Palladium

Platinum (Pt) and palladium (Pd) are the two most commonly used of the six platinum-group metals (aka platinoids), which also include rhodium, ruthenium, iridium, and osmium. As a group, these metals are rare in the Earth’s crust, silvery-white, malleable, and dense. They are highly resistant to wear, oxidation, and corrosion, have stable high-temperature and electrical characteristics, and exhibit catalytic properties.  The two metals are produced from primary mines and as byproducts from nickel and copper refining. They occur in unusual and specific geological environments in relatively few places on Earth. The largest deposits currently exploited are theBushveld of South Africa, Norilsk in Russian Siberia, Great Dyke of Zimbabwe, Sudbury, Ontario, and Stillwater, Montana. According to USGS estimates, 2012 platinum mine production was 179 tonnes and palladium was 200 tonnes, down 8% and 7% from respective 2011 levels. Recycling constituted about 29% of total supply. However compared to 2012 gold production of about 2800 tonnes, these are small markets supplied by a few big mines and companies.  South Africa dominated production at 74% with Russia at 13%. Remaining supplies came mostly from Zimbabwe, Canada, and the United States. Palladium mine production came from South Africa at 41% and Russia at 40%, followed by Canada, the United States, and Zimbabwe. As with many commodities, the United States is largely dependent on foreign supplies: 91% of our platinum and 54% of palladium consumption are imported. We consume nearly half of the world’s platinum and 30% of its palladium supplies. Because of their rarity and physical properties, platinum and palladium are considered precious metals and used in jewelry and investment coinage. However because demand is dominated by industrial applications, they are actually hybrid metals. Industrial use is overwhelmingly for chemical catalysts and dominated by exhaust systems for automobiles and trucks.  In 2011, platinum use stood at 38% for auto-catalysts, 31% for jewelry, and nearly 6% for ETF investments. Other important demand came from the glass, chemical, electronics, petroleum, and medical industries. Palladium use was dominated by auto-catalysts at 71%. The electronics industry consumed 16% and dental, chemicals, jewelry, and minor uses constituted the remainder. There was a significant net outflow from ETF investments in 2011. Because much of the world’s supplies come from geopolitically unstable, corrupt, and/or unfriendly countries and are dominated by a few major mines, districts, and companies, platinum and palladium are subject to supply and demand imbalances and price volatility:               Data Courtesy of Kitco.com Since the price of gold was floated on world markets in August 1971, the platinum to gold price ratio  (Pt : Au) has been greater than one (>1.0) about 85% of the time. Average monthly price ratios since 1970 are charted below: Ratio reversals (<1.0) occurred at various time periods lasting from over two years to a one month spike in December 1992 when the historic low was set at 0.78. The most recent reversal was from November 2011 thru mid-January of this year. Since 1970 the price ratio of platinum and palladium has varied generally between 2.0 and 5.0, largely reflecting palladium’s inherent price volatility compared to platinum:  Palladium price was fixed at the nominal price of gold ($35-36/oz) until mid-1972. From January 2000 to mid-2001, historic lows less than one (<1.0) occurred when rumors spread that Russia would cease stockpile sales to the West. Hoarding by American auto companies caused the price to briefly soar over $1000/oz. But then Russia’s balance of payments suffered, palladium was dumped on the market, and the price went parabolic. By July 2003, the metal reached a monthly average low of $162/oz. Ratio disruptions on the high side (>5.0) occurred in 1983-1984 and when auto industry demand collapsed during the global economic crisis in early 2009.  My interest perks whenever an anomalous Pt : Au ratio (< 1.0) occurs over a significant time span. This indicates that platinum is oversold and presents a buying opportunity. Such was the case beginning in November 2011; only recently has the ratio gone back over 1.0.  Several factors have caused platinum and palladium prices to rise substantially since early August:  · In 2012, South African and Zimbabwean miners engaged in widespread, violent strikes resulting in severe supply disruptions and constrained market supplies.  · An estimated 60% of South African mines currently operate at a loss or at break-even. · Economic conditions in the United States and China continue to improve and that has stimulated automotive sales and increased demand for platinoids. · Increasing environmental regulation of the auto industry in emerging market countries has resulted in higher demand, especially for palladium. · Although information from Russia operations is closely guarded and always opaque, it has been widely reported that historic palladium stockpiles are depleted and exports will cease this year. · Analyst consensus for significant 2013 supply deficits in both metals has led speculators to accumulate net long positions. In my opinion, there is a new price paradigm developing for platinum and palladium. The supply-side case is particularly compelling with the economic viability of most primary platinum-palladium mines not economic given current price regimes. Unless prices rise substantially, South African supply disruption will evolve into long-term destruction. The bullish case is strengthened if Russian palladium exports are indeed ending.  To my knowledge, there are no new major mines that can replace these looming reductions in platinoid supply. For a myriad of reasons, I maintain an ebullient view of platinum and palladium supply and demand fundamentals and predict that prices will remain robust for the short- to mid-term.  P.S. If you want to learn more about my evolving views of the platinum and palladium markets, check out these interviews: August 10, 2010; August 25, 2010;October 14, 2011; November 14, 2011; September 12, 2012; and February 14, 2012. Ciao for now,            Mickey Fulp Mercenary Geologist Acknowledgement: Michelle Lopez is the editor of MercenaryGeologist.com. The Mercenary Geologist Michael S. “Mickey” Fulp is a Certified ProfessionalGeologist with a B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc. Geology from the University of New Mexico. Mickey has 35 years experienceas an exploration geologist and analyst searching for economic deposits of base and precious metals, industrial minerals, uranium, coal, oil and gas, and water in North and South America, Europe, and Asia. Mickey worked for junior explorers, major mining companies, private companies, and investors as a consulting economic geologist for over 20 years, specializing in geological mapping, property evaluation, and business development. In addition to Mickey’s professional credentials and experience, he is high-altitude proficient, and is bilingual in English and Spanish. From 2003 to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and British Columbia.  Mickey is well-known and highly respected throughout the mining and exploration community due to his ongoing work as an analyst, writer, and speaker.  Contact: Contact@MercenaryGeologist.com Disclaimer: I am not a certified financial analyst, broker, or professional qualified to offer investment advice. Nothing in a report, commentary, this website, interview, and other content constitutes or can be construed as investment advice or an offer or solicitation to buy or sell stock. Information is obtained from research of public documents and content available on the company’s website, regulatory filings, various stock exchange websites, and stock information services, through discussions with company representatives, agents, other professionals and investors, and field visits. While the information is believed to be accurate and reliable, it is not guaranteed or implied to be so. The information may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. I accept no responsibility, or assume any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information. The information contained in a report, commentary, this website, interview, and other content is subject to change without notice, may become outdated, and will not be updated. A report, commentary, this website, interview, and other content reflect my personal opinions and views and nothing more. All content of this website is subject to international copyright protection and no part or portion of this website, report, commentary, interview, and other content may be altered, reproduced, copied, emailed, faxed, or distributed in any form without the express written consent of Michael S. (Mickey) Fulp, Mercenary Geologist.com, LLC. Copyright © 2013 Mercenary Geologist.com, LLC. All Rights Reserved.  ***

Platinum On The March?!

Over the past few weeks, some of my friends in the precious metals community have noted NICE price action ("price moving up") in platinum.  See below charts from kitco.com for the price over the past 30 days:

The price of platinum has risen from $1551 per oz to $1734 (up 11.7%), a pretty decent run.  Much of this is probably due to platinum production problems and labor problems in South Africa, the world's number one producer.  Car sales (the biggest end-user of platinum) are apparently up in the very important market of China as well (caution must be used with any data from CHINA, like I have to tell you guys that?).

Compare platinum with gold over the same 30 days:

Gold is about $1675 per oz (up only 1.5%, and off its recent high of $1690).  So, OK, "fundamentals" (problems in Pt production in South Africa) might explain this price movement in platinum.

***

Platinum has almost always sold at a premium to gold historically  Over the past four or so years, however, platinum and gold have moved together, almost a 100% correlation:

Note, however, that platinum was MUCH higher than gold was ($2000 - $2200 per oz vs. gold at $900 - $1000) soon before the financial crisis really got going in 2008.

I do not have historical information handy, but platinum through history has sold at some 50% higher (or so, readers are invited to correct me!) on the average than gold.

***

 I would now invite reader scrutiny of the above platinum charts.  Is the recent move in platinum really all that much?  I would say "No", not really.  Note that platinum has been in a trading range of $1400 - $1950 since about October 2009!

***

For our interest, let's look at palladium, "platinum's little sister".  Pd is also used as a catalyst in (some) cars, and does have some interesting properties as well (see my article on the platinum group metals here.).

Palladium is up some 14.8% in the past month.  And the past 5 years?

Now THERE'S an interesting chart!  Palladium (more than five years ago, so I do not have handy access to the pricing data) was well over $1000 / oz because Ford had bought up a whole lot of it based on the Russians saying it was "scarce", I read that Ford took a $1 billion (or more) loss on their palladium, whoops!  But, look where we could have bought palladium in late 2008, as low as under $200...

And just to finish up what kitco.com has re platinum group metals, here are the same charts for rhodium:

Do you think that rhodium does not move around much?  How about this (past five years):

Yow!

From $10,000 at its peak, to $1225 now!  Now THAT is a swan dive!  It went off the cliff in the financial crisis in 2008.  Bet you are glad you didn't buy any back then!

***

My main point in this article is that the recent moves in platinum appear to me to be nothing unusual.


N. N. Taleb, in his new book Antifragile warns us to watch out for the noise when looking for the signal...  And, as I mentioned before recently (http://robertmixblog.blogspot.com/2013/01/stocks-have-been-performing-well.html), "cherry-picking dates matters" a lot!  Yes, production problems in South Africa (appear to) have affected the recent price in platinum, but the price movements by historical standards is NOT impressive.

I am NOT poo-poo-ing platinum!  I own some and love it!  And there is an argument for saying its price future may be better than gold (although King Gold will win in the end).

Update:

Contributor "Benjamen" at pmbug.com supplied me the below historical chart showing price of platinum (top), gold (middle) and the platinum:gold price ratio (bottom) for the years 1976 - 2005.  While there is considerable variation in that ratio, it works out to about an average of 1.3: 1.0.  The ratio is now about 0.95:1.0 (platinum is relatively cheap by historical standards).  Thanks, Benjamen!

Basic Facts: Platinum And Platinum Group Metals

I got some nice feedback from my article on basic facts about gold (http://robertmixblog.blogspot.com/2012/04/gold-basic-facts-for-99.html) and one reader asked me if I would do similar articles for one or more other precious metals.  So here you are, "Veyron", you're famous!  Today I tackle platinum and the other "platinum group metals".

Much of the information about these metals comes from wikipedia.org, thanks wiki!

I chose to write about platinum (and its cousins) because Pt is my second largest $-value holding among the precious metals.

Below is a small table showing the atomic number and chemical symbol of each platinum group metal:

44	45	46
Ru	Rh	Pd
76	77	78
Os	Ir	Pt

All of the platinum group metals are used to some degree or other in electrical contacts, including spark plugs for cars.


Platinum (Pt)

Platinum is the least reactive metal, it is only dissolved by Aqua Regia (25% nitric acid and 75% hydrochloric acid) and has a melting point of 1768 degrees C (Celsius, so quite a bit more using degrees Fahrenheit).  Platinum is corroded by halogens (chlorine, etc.), cyanides, sulfur and alkalis (sodium, etc.).  Platinum is much rarer than gold, there is approximately 10 times as much gold as platinum.

The specific gravity (density) is 21.45 g/cc.

Platinum is fairly hard for a precious metal (Mohs hardness of 4 - 4.5, Mohs hardness is NOT a good measure of hardness, but it is familiar to rock collectors, etc.).  (Gold has a Mohs hardness of 2.5, rather soft).

Platinum can hold a lot of hydrogen gas (although palladium can hold even more).

Wikipedia writes that platinum salts are somewhat toxic to the eyes and skin, but the metal itself is not.

South Africa produces roughly 80% of the world's platinum, Russia about 11% and there are much smaller amounts produced by other countries (including the USA, in Montana).

Wikipedia also writes that in 2006 there were about 239 tonnes (metric tons, equals 1000 kg or approx. 2200 lbs) sold:

 Sector                                                           tonnes

Vehicle Catalytic Converters	130
Jewelry	49
Electronics	13.3
Chemical Industry Catalyst	11.2
Various Minor Applications	35.5

It is not clear how much platinum is used by investors, probably not much.  There are lots of places you can buy platinum coins, mostly on-line, although some coin stores do carry them.

Palladium (Pd)

Palladium is the next easiest to buy of the platinum group metals.  Canada for a few years made Palladium Maple Leafs, I am not sure if they still do.  Russia (USSR) also made two sizes of "Ballerina" palladium coins.  I do not know if they are still made or not.

Palladium has a density of 12.02 g/cc, melts at 1555 degrees C and has a Mohs hardness of 4.75.

Palladium has two interesting properties that may make it play a more prominent role in the future:

1)  It is impermeable to all gases except hydrogen

2)  It can store up to 700 times its volume of hydrogen

The above two properties may become very important if they ever get fuel cell technology working well.

Palladium's main use in is catalysts, but there is some use as jewelry and a very small amount held by investors (like me!).

In 2007, Russia produced 44% of the world's Pd, followed by South Africa producing 40%, Canada 6% and the USA 5%.

Rhodium (Rh)

Rhodium is the last of the three platinum group metals that are available in investment coin form (www.rhodiumcoin.com).  kitco.com also sells rhodium, but not in coin form.

Rhodium has a density of 12.41 g/cc, melting point of 1964 degrees C and a Mohs hardness of about 6.0 (harder than glass and similar to steel).

Rhodium is extremely rare, exported by South Africa and Russia.  Annual world production is only about 25 tonnes.

Almost all rhodium is used as a catalyst (especially used in vehicles).  Rhodium does have uses in alloys with other platinum group metals and is also used in monitoring neutron flux levels in nuclear reactors.

Rhodium is also fairly well known for its dramatic price swings.  A few years ago, the price of rhodium soared to a bit over $10,000 per toz!  It is now around $1350, priced below both gold and platinum.

Ruthenium (Ru), Iridium (Ir), Osmium (Os) and one more!

Ruthenium, like the other platinum group metals has a high resistance to chemical attack.  The density is 12.45 g/cc, melting point of 2334 degrees C and has a Mohs hardness of 6.5 (harder than most steels).  Only some 12 tonnes of Ru are produced each year, and the world reserves are thought to be some 5000 tonnes.  It is used to harden platinum alloys, to improve corrosion resistance in titanium, and to make wear resistant electrical contacts.  A new use of Ru is as a component 3% or so) for high-temperature single-crystal superalloys used for turbine blades in jet engines (see below re Rhenium).

Iridium has a density of 22.56, very close to the densest element (Osmium).  Ir has a very high melting point of 2466 degrees C and has a Mohs hardness of 6.5.  Iridium has very high hardness and strength properties beyond Mohs hardness, which is means that it is used where very tough and hard metal is needed in components, but being so hard, it is hard to work with.  Wiki: Despite these limitations and iridium's high cost, a number of applications have developed where mechanical strength is an essential factor in some of the extremely severe conditions encountered in modern technology.^[4]  Iridium becomes a superconductor at 0.14 degrees Kelvin.  Ir is the most corrosion resistant metal known (I do not know how that remark squares with platinum being the least reactive metal).  Not even Aqua Regia dissolves Iridium.  An alloy of platinum and iridium was used to fabricate the "Standard Meter" and "Standard Kilogram", both are in Paris.  Annual production is around 3 tonnes.  Iridium is found in MUCH higher amounts in meteorites than in the crust of the earth and the "K-T Boundary" (Cretaceous-Tertiary Boundary, some 65,000,000 years ago in the geologic record), it is thought that this is what remains from the big meteorite that hit the Yucatan and killed off the dinosaurs, in that so much of the debis after impact got blown into the atmosphere and then settled worldwide.  Wiki has one more interesting thing about iridium: It is thought that the total amount of iridium in the planet Earth is much higher than that observed in crustal rocks, but as with other platinum group metals, the high density and tendency of iridium to bond with iron caused most iridium to descend below the crust when the planet was young and still molten.  

Osmium has the highest density of any known metal (22.59, just barely higher than iridium).  It's melting point is 3033 degrees C (over 5000 degrees F) and has a Mohs hardness of 7.0.  Like iridium it is used in electrical contacts and instrument pivots.  Osmium is the rarest stable (non-radioactive) metal on the planet and is found at an average concentration of 0.05 ppb (or 50 parts per trillion).  Neither the producers of osmium nor the US Geological Survey report on osmium production.  The USA uses about 2000 troy oz each year, and so it is inferred that the annual production is less than 1 tonne.

Rhenium (Re), while not a platinum group metal, is expensive, rare and shares some applications with those metals.  Rhenium will have a future in the superalloys mentioned above (with ruthenium), tehg next generation of turbine blades for jet engines will use rhenium and ruthenium.  Rhenium is priced by the kilo, priced out to the troy oz it would run some $140 / oz.

***

So how can one buy platinum group metals?  I will deal with the three rare ones (for which there are no coins) as they are hard to get, and not really suited for investment purposes.  There is one company (there may be more, probably is, for researchers, etc.) that can supply these three (Ru, Ir and Os) in small quantities:

http://www.elementsales.com/

Take a look at their osmium for sale,one troy ounce is only $940!  Smaller sizes available.

http://elementsales.com/pl_element.htm#os

elementsales.com is part of Metallium Inc., and is specially geared to selling small amounts of almost every element, mostly to researchers, hobbyists and collectors (yes, there are collectors of the chemical elements).

There is another company out of the UK that sells many minor metals to the wholesale trade.  They are very good at sourcing rhenium, for example.  The company is called Lipmann Walton & Co. Ltd., their website is http://www.lipmann.co.uk/.

http://lipmann.co.uk/metals/metals.html shows the Periodic Chart and the metals they sell (dark blue squares, bright white letters):

Click on the highlighted metals to see more details or contact us.

***

And for investing in platinum and the other two (palladium and rhodium)?  The below table shows specifications of various platinum coins available for sale, the Pt Noble is actually from a private mint (The Pobjoy Mint).  Note that Canadian Palladium Maple Leafs (1 troy oz only) and the Cohen Mint 1 toz rhodium coin are also available.

	Weight	O.D.	Thick
Coin	(grams)	(mm)	(mm)	Fine
1 toz US Pt Eagle	31.12	32.70	2.39	999.5
1/2 toz US Pt Eagle	15.56	27.00	1.75	999.5
1/4 toz US Pt Eagle	7.78	22.00	1.32	999.5
1/10 toz US Pt Eagle	3.11	16.50	0.95	999.5
1 toz Pt Noble	31.12	30.00		999.5
1 toz Canadian Pt M.L.	31.10	33.00		999.5
1 toz Australian Pt Koala	31.10	32.10	2.70	999.5
1 toz Canadian Pd M.L.	31.10	33.00		999.5
1 toz Cohen Mint Rh	31.10	37.00		999.5

American Platinum Eagle information is from http://www.usmint.gov/downloads/mint_programs/am_eagles/AmerEaglePlatinum.pdf and http://en.wikipedia.org/wiki/American_Platinum_Eagle

Note!  The O.D. (Outer Diameter) of the Pt Eagle is the same as the Gold Eagle!  This means that you can stack the Pt Eagles in the same plastic tubes ("US Mint" tubes) as the gold ones.  These tubes are how many stackers collectors store their Gold Eagles, the tubes themselves snugly hold them (and so "control" or measure the 32.70 mm measure).  These tubes hold up to 20 Gold Eagles and 23 Platinum Eagles.

***

Here is spot pricing (at least as of 19 April 2012).  Note that small buyers (that's us!  Shrimps!) will pay quite a bit more than these prices as there is not nearly as much liquidity for many of these metals.

Market Prices for Metals

Courtesy www.thebulliondesk.com