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


About the author

Tim Staermose is Sovereign Man’s Chief Investment officer, based in the Asia-Pacific region. Born to a Danish father and British mother in Dar Es Salaam, Tanzania, Tim has led an international life since the day he was born. He has lived and worked throughout Asia, primarily focusing on equity research and emerging market opportunities.

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