Hedging bets with platinum and gold

16:00, Jan 19 2013
Previous metal: Parity between platinum and gold means markets are nervous.

Platinum. Now that's a word that rarely enters my consciousness. Gold? Yes. Silver, occasionally, but before the last month I had barely given a thought to the silver-white element that is commonly thought of as the rarest of precious metals.

Then, just like that, I heard about platinum three times in as many weeks.

First off, when discussing the redesign of an old ring, my jeweller suggested platinum as an alternative to gold. I had assumed that platinum would be way over the top but he suggested that the price relativities today meant I could get a premium-quality metal for around the same price as gold.

Then I noticed a Forbes article with the headline "Gold becomes pricier than platinum, that's rare and scary". The article noted that the gold price has risen more than 130 per cent in US dollars since the global financial crisis but that platinum has done better still.

It said that platinum should be priced at a premium to gold because although the two metals' scarcity is about the same, platinum is more difficult (and therefore more expensive) to extract. Also, platinum is more useful than gold - one third of annual output is used in industry and another third is used to make catalytic converters in car exhausts. By comparison, 85 per cent of global gold demand is for adornment or as a store-of-value (when people get nervous and prefer gold bullion to bank notes).

The "scary" reference was because historically, the platinum price has slipped below the gold price only at relatively scary times, such as during the recession of 1991 and the global stockmarket's once-in-a-generation low of 1982.


Then, in January, in the midst of US debt ceiling/fiscal cliff discussions, someone made an out-there suggestion: mint a $1 trillion platinum coin that could be used to finance the government's budget for the year ahead. Apparently there is an obscure US law that allows the Treasury to issue platinum coins of any denomination. Because the Treasury, rather than the Federal Reserve, would mint the coin, it would have the same effect as quantitative easing and would not be inflationary.

The suggestion was whacky, if only because a true $1 trillion platinum coin would apparently weigh more than 19,000 tonnes and be 0.9 cubic metres in volume. But then, many would suggest that minting a large platinum coin to repay debt is no different to printing millions of dollar notes, which the Federal Reserve has been happy to do.

So, how is one to interpret these signs?

Arguably, if we are heading for scary times and another recession, I should get my ring made in gold because it will hold its value better than platinum. But minting a trillion-dollar platinum coin would take out more than 10 per cent of annual platinum production, creating scarcity and therefore pushing the metal's value up.

And of course, Treasury might not stop at $1 trillion - why not mint enough coins to cover five years' worth of debt repayment?

Think I'll get a bit of both - what a nice way to hedge a bet.

Carmel Fisher is managing director of Fisher Funds, an investment manager and KiwiSaver provider.

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