Gold decouples. 4 charts to solve the paradox.
Supply and demand is the basis of price, or so we are told as the first thing we get taught about economics. Soon enough we are taught markets are near perfect pricing mechanisms, so the price is generally right unless the market has missed something.
Can we take that as read? You certainly have to be very contrarian to believe it is otherwise by much. There are of course exceptions to any rule and investors are in the hunt for such things to profit from the return to efficiency.
So lets take another idea that is a basic investment concept. Precious metals prices should kind of map. They should track. That is to say, go up and down pretty much in the same way and the same time. They might not keep the same relative price all the time but even that will kind of show some continuity. Their preciousness is the key rather than their usage and if their use cases change they will still kind of tick up and down together from moment to moment.
Here is a chart of Gold and Silver, a classic pair.
Makes sense.
How about Silver and Platinum.
You can see the connection and you can see the decoupling.
So hang on in there here comes the interesting stuff.
Gold price versus Silver price. 100 to 1. Lets keep the numbers round and easy. It was 5 to 1 a very lont time ago, then 10, then 20, then 40 now 100….
Its down to supply and demand right?
Well Gold production 3200 tonnes, Silver production 25000 tones, only 8 times as much as gold.
So Gold is 100 times more valuable, but silver has only 8 times the production, so that seems a bit off. A lot of silver fans hang on this to suggest Silver will one day moon and do a lot of catching up, but that hasn’t happened, as yet.
So you can see Platinum tracks with Silver which you would expect but detached in 2024.
Lets look at Platinum versus Gold. Platinum tracks, it rises and falls in sync but doesn’t keep up at all.
So Platinum is roughly $1000 and ounce, Lets call Gold $3000 to keep it easy to figure. Now this is where it gets interesting. Gold has a 3200 tonne supply a year. Platinum is 180 tonnes. Yes there isnt a zero missing for Platinum.
Platinum has 6% of the new supply of Gold, basically zero tonnes when you think of global scales, and is 33% of the price. (Note: you will pay a 50% premium for a Platinum Rolex over a Gold one but that’s just another cognitive dissonance.)
I would say the world supply of Gold is fulsome and the world supply of Platinum is next to nothing, so looking at the price you would be forgiven think Platinum is extremely cheap.
So here is the call to choose between.
Forget Platinum, who needs it, its over for Platinum. Gold is where its at.
Or
Platinum is cheap as chips and will catch up someday big time.
You can also say the same for Silver. With 8 times the supply why would it remain 1% of the price, Gold shouldn’t be x100, x50 maybe, x20 like the old days maybe but x100 seems a stretch.
Gold at 170x supply to Platinum and 3x the price is certain off the dial weird. Prorating the production with Gold’s price, Silver should be $400 an ounce and Platinum $56000 an ounce.
Of course, both these calculated numbers are wild and crazy and are not going to be realised, but it underlines either the huge underperformance of precious metals that are not Gold, or a huge relative out performance of Gold itself. A ‘reversion to the mean’ on the upside or downside, would make for huge moves either way, but for a precious metal Bulls, it means much higher prices for Silver and Platinum are coming at some point.
So one more thought.
Palladium.
All this chart is telling you is ‘yup,’ these commodities can fly, as if we had any doubt and ‘yup’ they can fall out of the sky like an unlucky quail.
I love the current dead zone of recent times in the Palladium chart, because in my voodoo charting world, that says bottom to me.
The other precious metals will go up if Gold keeps on its trajectory and as such I am hiding from the wild volatility in equities using Gold, Silver, Platinum and Palladium as hedges. Never forget diversification is your friend even when plumping for precious metals.