Gold/platinum spread

Discussion in 'Commodity Futures' started by Cutten, Sep 30, 2008.

  1. Cutten


    This spread looks quite interesting right now. Platinum historically has traded at a nice premium to gold, of around 50-100%.

    With the recent bear market in commodities, declining industrial demand, and safe-haven buying of gold, this spread has really collapsed. Platinum is now just above $1000 and gold is in the $875 range, giving a premium of 14%.

    I think this offers a potentially interesting spread trade, buying platinum and shorting gold. Once the banking crisis fades and the economy returns to normal, I'd expect the premium to go back to normal levels of say 60-70%. That would be a potential 50% return, unleveraged, on a spread.

    The main risk is that with impending recession, and a banking crisis, there could be further spikes in the gold prices, and the spread might actually temporarily turn into a Texas Hedge where you could lose on both sides. It would be necessary in this case to be able to withstand the potential swings. Sometimes when spreads like this have major blowouts, they actually *invert*. So it's possible that you could get platinum going to a 10-20% discount to gold for a short while. That implies a short/medium-term quotational risk of about 20-30%. So if you want to limit your downside to say 3%, you would only put 10% of your capital into the long platinum/short gold position. The advantage of being conservative is that, should the spread invert, you will have a great opportunity to add size at very favourable prices. Buying at a 15% discount would give a 100% winner if the spread eventually reverts to normal levels.

    Another way to play it would be to chart the spread, wait for it to resume an uptrend, and then get long the spread - trading it just like a stock or commodity in a bull market. This lowers the risk, but gives greater chance of missing the move or suffering whipsaws.

    If you are patient, you could wait for parity - you'd then have 60-70% upside vs 10-20% downside, giving a R/R of between 3.5:1 and 6:1. I'd estimate the chances of a winning trade at 50% at least, probably more like 75% from these levels.

    Any thoughts?
  2. Yes, this has also occurred to me too.

    Also, Palladium at these levels may not be extractable. Then again, perhaps there may not be sufficient demand for quite some time....

    Unfortunately, I've been burned there before.
  3. jjftw


    thanks for the nice breakdown of this trade, i was thinking some time about doing a similar trade with long SLV short GLD, but now will look into long PTM short GLD too, if you have other ideas on how to put on this spread with instruments that trade on NYSE/AMEX please let me know

    and by the way Cutten your posts are the most thought out and useful ones from what i have recently read on elitetrader, thanks for taking the time and sharing with them
  4. In the very near term, gold will probably trend down into the $700s again as it was doing until the last 2-3 weeks, unless there is a major market collapse like not passing some bailout legislation.

    I do not watch platinum or palladium, so not sure why the recent collapse... Longer term, given its rarity it seems both are still going to be in strong demand for cat converters
  5. kxvid


    I wouldn't hesitate to put all my money in palladium if it went down to $150. Ditto in platinum if it broke deep into triple digit territory. Palladium is defiantly a more speculative investment than platinum.
    That is because it is not a traditional safe haven, but still I believe there is alot more upside buying Pd than the safe havens: Au, Ag, Pt.
  6. How about rhodium? Its the most expensive of them all the platinum group metals, in 03 it was around $350 back in May this year it was over $10k (all per 1 oz) now it is around $3500. My guess for the drop in rhodium and platinum is the uncertainty of the auto company's sales and possible slow down of production of cat converters, and maybe less importantly yet still something low discretionary spending in jewelery.
  7. dont


    Been watching the same thing, been waiting for parity or a discount and also if Platinum goes below $900, it costs the mines about $900 to produce.
  8. Platinum GC was a great spread to be in this week. I think that further value remains, platinum below 1000 is a definite buy. I have heard that the slowdown in auto sales put the damper on Platinum? Has anybody else read that? Do you have a pos. Cutten??
  9. No doubt, plus I'm sure the other non auto industrial demand for it has slowed not to mention jewlery demand..
    Wouldn't touch palladium here as it has the same problems as plat but with substitution demand constraints from platinum becoming cheaper.
    I would be really carefull with a gold/plat spread here as I'm not sure the factors that kept the correlation togather the past 5 years are really in play at this point.
  10. Interesting topic and I'm sure that long term it is a great trade - just depends on how long you can wait for it to pay out. Who knows when the auto industry will start to recover - until that happens there is no guarantee the ratio will return to normal. It might be helpful to look at the ratio during past recessions and then consider an even worse case for auto sales this time around.
    #10     Oct 16, 2008