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platinum to gold price wider than ever as dollar strength knocks metals

Precious metals have all taken a bit of a knock in recent months with a revival in the strength of the US Dollar. Platinum is an interesting one in particular – there are a number of factors in play including its relationship with gold, which suggests the metal is becoming increasingly undervalued.

Fundamentally, platinum is more expensive to mine and much rarer than gold, and as a consequence traditionally has been priced higher. There are far fewer locations to mine platinum too, with over 80% of mining occurring in South Africa – this makes the metal susceptible to any localised disruption. From a speculation perspective that might appear to offer potential upside in the event of a political disruption, however, it also links the metal to local currency fluctuations.

As you can see from the charts below, the main collapse of the price of platinum occurred from mid-2014 to early 2016 – coinciding with a weakness of the South African Rand. The platinum price recovered to over $1000 per oz in late 2017 on dollar weakness, but the reversal has seen the Rand weaken by around 30% over the first half of this year.

Supply & Demand levels

A look at the platinum price chart reveals it had been moving sideways between £900-$1000 per oz over the past 18-months, with repeated strong buying in the region of $880-900 creating a key ‘demand zone’.

Price action over the past 10 days has seen a move to the downside with platinum now clinging to the bottom of a downward trend channel (orange). It’s quite possible, that platinum will bounce from here, but continued dollar strength would likely block this eventuality.

The obvious next level for demand is the all-time lows from late 2015, at around $815-$835. I’ve also marked a steeper declining trend channel on the chart based on the two recent main peaks and the past main low (purple) – if the dollar continues to its march considerably longer, the low of this channel might even be reached.

An initial positive reversal indicator to look for is a break above the diagonal resistance line (solid black). The ultimate longer-term reversal indicator – which might see a return to a more traditional platinum/gold price ratio – would be a breakout above the dotted line formed from the peak prices of 2011 and 2012. Until then, it’s unlikely platinum will retrieve it’s ‘Rich Man’s Gold’ tagline.

Author: Stuart Langelaan

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