There is nothing wrong with the occasional high-risk speculation, of course. But as investors, we need to be honest with ourselves about the risk we are taking, and we should separate long-term investment capital from short-term trading capital.
With investor risk appetites returning, I see virtually all risky assets doing well for the remainder of 2011. This would — and I say this through gritted teeth — include gold.
Still, investors wanting to profit from a short-term move in the yellow metal shouldn’t get too attached. Gold jewelry and industrial demand has been stagnant for most of the past decade; virtually all of the new demand that has caused the price to quintuple has been because of “investors” ranging from hedge funds and ETFs to individual investors who have given up on the stock market. Gold still is trendy, and trendy investments often prove to be disastrous. Just ask investors who bought Netflix (NASDAQ:NFLX) at $300 per share.
Gold also is looking overpriced relative to other precious metals, and particular to platinum. Let’s take a look at Figure 1, which tracks the gold/platinum ratio over the past two-and-a-half decades.
Today, gold is more expensive relative to platinum than at any time in the history of the chart. It should be noted that platinum is a far rarer metal than gold. And unlike gold, platinum also has extensive industrial use (particularly in the auto industry) in addition to its use in jewelry.
In 2008, the price of gold surged relative to platinum (note the vertical move in the chart) in large part because of platinum’s industrial value. Gold’s uselessness actually was a virtue because its demand was not tied to auto production. But as life returned to normal in subsequent months, platinum rallied relative to gold. I would expect to see a repeat of this in the months ahead.
If you are determined to buy a precious metal, platinum might be the better bet at current prices. But whether you’re a skeptical gold bear like myself or a dedicated gold bug, you might try something a little different. Consider a pair trade — buy platinum and short gold.
Whether precious metals rise or fall — and whether the market remains in “risk on” mode or lurches back into “risk off” mode — investors can profit from the gold/platinum ratio returning to something a little closer to normal.
As of this writing, neither Charles Sizemore nor Sizemore Capital Management had a position in any of the securities mentioned.