Gold bubble talk, admittedly, has largely been proven silly in the short-term. Gold prices have soared 30% since April and long-term the precious metal has quadrupled in a little over six years.
But as the old saying goes, there’s no such thing as a sure thing on Wall Street. So allow me to poke one more needle at the gold bubble idea by breaking down the meteoric rise and painful crash of platinum just a few years prior. Gold investors could find the case study instructive.
For starters, let’s operate off the assumption that gold and platinum are very similar. Both are rare and pricey. Both are also used in industry – gold in electronics, for example, and platinum in catalytic converters in autos. Both are well-known hard currency investments, though gold coins and bars are obviously more common than platinum ones.
Theoretically the two metals should perform in very similar manners. Industrial demand for both metals waxes and wanes with the broader economy, and the demand from investors waxes as wanes with the broader appeal of hard assets. When gold is a good buy, platinum is a good buy. Right?
Directionally in the long-term, this is correct. But there is always one clear winner between the two.
Consider that since 2006, platinum prices have roughly doubled compared with an almost flat stock market. Gold has seen gains of nearly four-fold in the same period.
Obviously, it’s not as simple as throwing your weight behind both hard assets. They can move in much different ways and deliver much different results for your portfolio.
Platinum to Gold Ratio: A History
Finding out why one metal outperforms the other is tricky. There are many outside influences at play, but one easy way to discern which metal is overbought is by looking at the historic relationship between gold and platinum prices.
The average ratio of platinum to gold prices has been largely between 1.25 and 1.50 for the past few decades – meaning platinum typically is selling for 50% more than gold at most points in time. There are regular fluctuations, but any large deviation from this benchmark tends to result in a sharp correction back to the norm soon afterwards.
Consider the 1980 gold bubble – when platinum was on par with gold, and at times even worth less than the yellow stuff. As gold watchers should know, gold prices suffered an ugly flop of almost 50% in the early 1980s, plummeting from a peak over $710 to languish in the $375 to $475 range for the next three years.