Saturday, March 31, 2012

Platinum Gold Ratio

One way of measuring a recession is the Platinum/Gold Ratio. Platinum is much more scarce than gold and is also much more useful industrially so it should have a much higher price. However, gold is the quintessential store of value. So when economic output declines and there is a flight to safety, the ratio will decline.

"Economic activity is weakening when platinum prices fall below the price of gold because platinum is an industrial metal, said James Turk, founder and chairman of GoldMoney. And since gold is money, “monetary problems tend to worsen when the gold prices rise above the platinum price.”"

Gold became more valuable than Platinum on Sept. 2, 2011 and it has stayed that way ever since.  I'm not sure what this means, but it indicates that there is something still very wrong with the economy.

"Platinum is much more rare in nature than gold is. More than 10 times more gold is mined each year than platinum. Unlike gold, which is either held in bank vaults or used in jewelry, more than 50% of the yearly production of platinum is consumed (used up) by industrial uses, mostly in the automobile industry. Some 40% is used for jewelry manufacturing and 10% for investment purposes. The Japanese seem to be very fond of platinum as they account for 95% of the platinum jewelry demand. There are reports in the press of a nascent interest in platinum jewelry in India, expected to make up 25% to 30% of the total Indian jewelry sales in 2012.

The annual supply of platinum is only about 130 tons, equivalent to only 6% (by weight) of the total annual gold mine production. It is less than 1 percent of silver's yearly output. Unlike gold, there are no large inventories of above-ground platinum. Therefore, any breakdown in the two major supply sources, South Africa and Russia, would catapult the price of platinum. An even more intriguing fact is that more than 90% of the world's platinum production comes from only four mines: three in South Africa and one in Siberia.

During economic expansion, platinum prices tend to outpace gold given its dual role as both a precious and industrial metal. But when the economy slows down, platinum can often stumble. For example, platinum dropped below the price of gold back in the early 1980s, pushing the spread below 1.0 for the better part of five years as the economy slowly recovered."

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