I like the spread but wonder if this is now a less useful spread because of platinum’s declining utility. Thoughts?
Here is some input by my colleague Mark O'Brien: A spread’s lack of usefulness one way is a spread’s profitability the other way. If you conclude platinum is declining in utility and you see the gold / platinum spread as a way of trading that decline, you could buy gold and sell platinum. There’s a pretty good case to be made for this. Platinum has continued to struggle, trading with few exceptions mostly between $800 and $1,100/oz for almost seven years. In contrast, gold recently made a new all-time high above $2,150/oz and appears to be consolidating for yet another move higher. To trade the spread between the benchmark 100-oz. gold contract and the 50-oz. platinum contract, the spread is customarily placed with one gold and two platinum contracts to balance the leverage of the legs of the spread. For a fractional version of the spread, you can also trade one miNY gold – traded in 50-oz. contracts – and one 50-oz. platinum.
It’s a really complex topic, and if anyone had the exact answer, they’d make a fortune, of course. Personally, unless there are extremely strong fundamental industry changes, I think spreads like this are generally under utilized. Everyone always tends to say “it’s different this time” until it’s not. But of course I’ve been waiting for this particular spread to reverse for over a decade now haha. as far as fundamental reasons, people may claim this spread is no longer viable due to the decline of platinum automotive catalysts, however, this spread predates the use of auto catalysts. It is based more on the relative cost of mining each metal which has not changed. You could go into other minor fundamentals for days, but ultimately, I feel the cost of mining will eventually cause the platinum gold spread to return to its historic level. just my opinion.