1

Looking at the price of platinum today it is fairly close to gold.

http://www.kitco.com/charts/liveplatinum.html http://www.kitco.com/charts/livegold.html

I know that platinum is more volatile than gold, but I also know that historically platinum has risen to significantly more than gold per unit.

What are the risks of buying platinum now and hoping that it will jump back up when the demand rises considering its almost 1-1 right now?

4

You observe that two commodities that trade in tandem, i.e. a high correlation, but not 100%, with one typically maintaining a premium over the other. In this case, Platinum and Gold. There are a number of concerns surrounding the attempt to profit on this.

  • What if you are right, and to get back to normal, gold drops $400? You're sitting on platinum and see no profit.
  • Instead, you buy platinum, and short gold. You have less risk, as long as gold falls more than platinum or platinum rises faster, you make money. The premise is that there's still a correlation.
  • The short will cost you margin interest. Over time this eats into your profits.
  • Other choice is to use futures. Time is a killer, as contracts have to be rolled over and contango is an issue.
2

Besides the risks that @JoeTaxpayer mentioned (which are all valid), you also run the risk that you've experienced a regime change. What I mean by this is that you could be seeing the new normal.

As an example of this happening, consider this chart for gold:

Gold Chart

What Happened between 1968 and 1983?

A couple of things happened, but the biggest regime change was the Nixon Shock. Prior to 1971, any foriegn government could exchange US Dollars for gold at $35 an ounce. During this time you wouldn't see gold diverge away from $35/oz because there were goernments that could arbitrage it back. After 1971, the price of gold became free floating, and shorting gold at $36/oz would have ended terribly.

What does this mean for Gold/Platinum

It means you need to make sure (i.e. convince yourself) that things haven't changed. Is anything affecting the supply/demand of either? Will that change back?

0

I have to say, you cannot make a decision based on that chart, if you are looking towards historical price movements, look at a number of charts to determine the major support areas, but in all honesty, you need to have a confirmed bottom before taking any position going long. Minimise your risk with confirmed rebound from support, drop your stop in below the support and you have a defined trade.

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