Dissolving the Ratio: Platinum’s Fall from Grace and How to Profit from It

Platinum has historically been considered by many investors to be one of the most expensive and exclusive precious metals. Its status as the king of precious metals, outshining gold and silver has rarely been tested. Now with an economy that’s been slumping coupled with less and less industrial production occurring worldwide, platinum’s role as the precious metal patriarch may be eclipsed for a short period.

The largest consumers of platinum worldwide are industrial producers of goods like computers, auto parts, and glass. The demand for these and other luxury products are completely dependant upon worldwide economic health. When economies are grinding to a halt, who wants to buy a new automobile or computer? The fact that those industries in which platinum is most widely used are some of the first to feel the effects of a global economic slowdown is evidenced by the falling value of platinum in the precious metals market.

Up until a few months ago platinum’s performance has loosely followed that of other precious metals. Trading at $2252 per ounce in March of 2008, its value has been decimated to a level not seen in over four years due to decreasing demand in the industrial sectors, as it currently hovers just below the $1000 mark. Traditionally the ratio of platinum value to gold value has been roughly 2:1, gold having approximately half the value of platinum on any given day.

However something curious has occurred recently that has shifted the gold and platinum ratio to almost 1:1. Gold, which fell from over $1,000 an ounce in March to the mid $700 range to currently around $900 has shown steady gains and losses over the past nine months. For each massive loss there was a smaller but equally significant rebound. This has helped keep the value of gold, a metal that many investors rely on as a hedge against inflation, consistently between $800 and $900. Platinum on the other hand has had its value consistently stripped away since March, reflecting the slowing industrial demand for the white metal.

If the precious metals markets are analyzed as not one conglomerate of metals trading, like any other investment commodity, but instead from the perspective of having relatively independent and unique catalysts for the valuation of each metal, it is possible to see exactly how platinum is likely to perform in the short to medium term. Compared to gold, platinum’s stark performance is beginning to become less of a prediction and more of a reality. The equalization of the platinum to gold ratio is a once in a generation opportunity for precious metals investors to rake in potential gains upon the recovery of the economy and wide-scale reversals in industrial production.

Once economies begin to thaw out and consumption of consumer goods containing platinum resumes, the price of platinum will likely begin its return to the 2:1 ratio with gold. If investors were to liquidate their gold assets in favor of platinum, which is currently trading almost 1:1, a year or two of waiting could pay off in spades. When platinum returns to its rightful precious metals throne locked in at a 2:1 ratio with gold, the window of opportunity will have closed.

In the hands of many different worldwide governmental entities, the current economic stagnation will likely take the better part of 2009 to remedy. But given these specific circumstances, the smart precious metals investors will see the current economic downturn as the perfect opportunity to consolidate their precious metals portfolio or physical stockpile into a platinum-heavy position.