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The most obvious trade in precious metals since silver went parabolic in March

Date: December 15, 2011
Reporting From: Manila, Philippines

[Editor’s note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]

Earlier this year, when silver went parabolic, rising from $30 to $50 in a matter of weeks, I issued an alert saying I’d put on a short-term bearish trade, using call options on an inverse silver ETF.

I missed calling the exact top by about a day, but many subscribers made a nice, fast profit nonetheless as silver pulled back by 30%. Since then, gold’s cheaper cousin has been trading in the $30 to $35 per ounce range, and generally been pretty boring from a trader’s perspective.

Consequently, aside from accumulating some physical silver and gold to hold for the long-haul, I’ve not been active in the precious metals markets.

But now I think there’s another opportunity staring us in the face. This time, it’s in platinum.

Platinum prices have been hammered. They’ve fallen so far, in fact, that the platinum price is at $1,440, versus $1,613 for gold, as I write.

This seldom occurs. Platinum is much rarer than gold and costs way more to produce. Even the richest platinum ore gives up only about 1 ounce of end-product for every 5 tons of it mined. More than 70% of the world’s platinum supply is mined in South Africa, and vulnerable to supply interruptions due to the power shortages that plague the country.

At some point, I think the natural order of things will reassert itself, and platinum will again sell for a substantial premium to gold. Of course, there’s a possibility that it will be gold that falls, rather than platinum that rises. But, longer-term I just don’t see that happening. There is still a very definite uptrend in the gold market, which remains intact.

One reason platinum has been sold off is concern about the economic downturn in Europe. The biggest single use for platinum is in catalytic converters for diesel-fueled vehicles. And Europe is the biggest market for these.

However, off-setting that is the bullish case for platinum jewelry. For one thing, since it’s cheaper than gold now, but much rarer, it’s easy to make the case that platinum jewelry is a better investment. For another thing, it’s very popular in China.

Chinese couples often use platinum for wedding and engagement rings, rather than gold. And this trend is accelerating. Most jewelers also consider platinum far superior to gold for setting earrings and so forth.

And then there’s the trend in many developing countries toward making the fitting of catalytic converters to motor vehicles compulsory the way it already is in most advanced countries, in order to combat pollution. Again, catalytic converters (which clean exhaust fumes) are the main use for platinum.

A cheap (relative to gold) price, and bullish long-term demand trends, as well as the ever present risk of supply disruptions, puts platinum firmly on my list of solid speculative trades at the moment.

My conservative 4th Pillar investment strategy is the sort of thing I use to make 15% returns on 90% of my money. The occasional speculation, such as buying platinum, or options on a platinum ETF, is the sort of thing I do to try and make 100% returns on 10% of my money.

The key difference is that with the 4th Pillar, the RISKS are minimal. My capital is never going to be frittered away.

Speculating on the direction of precious metals markets can be very lucrative, as it was for me when I went short silver around $50 back in April. But, the risk of getting it wrong and losing most of my capital mean it’s only something I do occasionally. And even then, only with small amounts of capital. Platinum is one of those speculations I’m going to make.

Tim Staermose
Chief Investment Strategist


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About the author: Born to a Danish father and British mother, in Dar Es Salaam, Tanzania, Tim Staermose has led an international life since the day he was born. Growing up, he also lived in Egypt, Denmark, and Singapore, before eventually settling in Australia, where he completed his education and took out citizenship. Since then he has also lived and worked in Hong Kong, and Manila, Philippines, in the field of equity research — both for a bulge-bracket Wall Street investment bank, and for an independent investment research firm. Today, when not traveling the globe looking for investment and business opportunities for the Sovereign Man community and catching up with his diverse, multinational group of friends, he divides his time between Hong Kong, and the Philippines.

Comments on this entry are closed.

  • Sebastien Desse

    If we are in a replay of 2008 or worst then it’s a risky trade!
    Need to wait the dollar, gold and silver to find supports maybe before a buy but still current level appear still high.

  • CQ

    “Chinese couples often use platinum for wedding and engagement rings, rather than gold.” 

    Ever wondered why? Because Chinese women want whatever has the highest price.  Which implies they’ll switch back to gold now, so watch THAT trend accelerating…  That’s what my Chinese friends say, so straight from the horses’ mouths.

  • http://www.facebook.com/people/Christopher-Neal-Wyatt/1104489568 Christopher Neal Wyatt

    I agree that platinum is undervalued. In the derivatives-backed casino we call the futures market, all precious metals are drastically undervalued, in dollar terms.

    Having said that, I don’t believe that the increased motorization of the planet will necessarily lead to an increased demand for platinum for use in catalytic converters, for the simple reason that other, less expensive materials can perform the same task. Read the following USA Today article:

    “New catalytic converter material could make for cleaner, cheaper cars”

    [url: http://content.usatoday.com/communities/sciencefair/post/2010/03/new-catalytic-converter-material-could-make-for-cleaner-cheaper-cars/1

    Personally, I believe that going long on silver- “the indispensable metal”- remains the most obvious precious metals trade.

  • Leopold

    How about the following trade:
    Palladium versus Swiss franc? Easily implementable in the form of ETF.

  • Leland

    In 2008, when people were forced to deleverage, platinum was one of the first things to sell off. It wouldn’t surprise me if that is happening again. If that is the case, in my opinion, it would be a bit premature to get into platinum.

  • KeepAsking

    Today spot platinum prices dipped briefly below 1380 & are moving slowly higher, currently at 1419. Buying physical platinum is certainly not going to result in you losing most of your capital or frittering it away. Even if platinum continues its downtrend in the short term, it will eventually  rise in price against the fiat currencies (especially when the printing presses roll in Europe & US). However, you will lose all your money if you buy platinum ETF options & don’t time things right. Buy physical, cut your risk.

  • Hiday_happy

    like u i made the right things

  • Clint

    I would love to know about the Chilean farm. Who could I contact? Thank you.

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