There has so much activity in the precious metals in recent weeks, and most of it has been focused on gold, which continues to make record highs. However, it’s been a challenge to look for good entry points in gold if you are not already in the market. There are other metals you can trade that also look promising, namely silver, platinum and palladium.
For those who have held long-term positions in gold, it’s been a good run, and I think gold’s long-term story remains bullish. If gold corrects back to $1,100 an ounce or $1,080, it would be worthwhile to consider buying. But right now, for many investors gold may be a little too hot. I think it’s time to start looking for opportunities in metals besides gold.
Because commodity trading is becoming more commonplace, we can’t ignore new speculative demand for metals in general too. Traders and investors are concerned about their wealth being inflated away by central bank printing of currency, and are defending themselves with hard assets.
Silver
One place to look to for an alternative to gold is silver. Silver is unique in that it is not only a precious metal like gold, but also has industrial uses. Silver is well off its 2008 highs, and even before adjusting for inflation, silver is well below it’s highs of the 1980s. Silver has been hindered by the global recession, as it is used in the production of a variety of industrial goods. As industrial demand drops off, typically the price of silver does too. I believe silver will keep pace and maybe even outperform gold. It has good potential to move up as the economy recovers.
Platinum
Platinum is a commodity that is not very widely traded, although it’s fairly liquid, moves nicely, and has interesting and unique characteristics. Similar to silver, it is a precious metal and an industrial commodity. Women know about platinum wedding rings, but platinum is used in electronics, and about 80 of its use is for catalytic converters in cars. Platinum is a catalyst that helps the burning process. It essentially converts nitrous oxide and carbon monoxide (damaging emissions) into carbon dioxide and water. The environmental issues surrounding cars make it important for them to have catalytic converters to burn off these dangerous gases.
In China, the growing new middle class has been buying cars in greater numbers. Car ownership in China is just 2.9 percent of the population, one of the lowest rates in the world. However, according to an article in China Daily, ownership is expected to grow to 148 cars per every 1,000 residents by 2020. So if these types of projections play out, that represents a lot of potential catalytic converters in those new cars. Initially, the Chinese probably won’t put them on their cars, but eventually, the environmental impact will require it. The Olympics in Beijing made China face their environmental issues. They needed to reduce pollution and they got a picture of how bad it really is. They will have to start putting catalytic converters on their gasoline-powered cars, eventually.
Platinum doesn’t have a strong base of production, so it doesn’t take long before there is a shortage. Platinum got well ahead of the price of gold in 2008, then fell behind for a while. Now it’s gotten ahead of gold yet again, but similar to silver, this market hasn’t recovered even half of its decline from the peak in 2008. There is a lot of room for platinum to appreciate.
Platinum is very rare. There are only three places in the world it is produced: South Africa, the Sudbury basin in Ontario, Canada, and Norilsk, Russia. About 80 percent is produced in South Africa, so if you really believe in this story, you could consider buying some South African rand futures, as it would be good for the currency if prices go up.
Platinum is a 50-troy ounce contract. This market is not as liquid as gold, but is definitely tradable. View contract specs.
Palladium
Palladium has similar properties as platinum. It doesn’t have the same appeal for jewelry, but is also used in electronics and catalytic converters, and also in hydrogen fuel cells. If we ever happen to move into a hydrogen-based economy, and fuel cells are in our cars, palladium will become more important commodity. (Keep that in the back of your mind!) Palladium production is also based in the same places as platinum, with Russia being the key producer.
You can spread your exposure trading both these metals. Generally, the story is the same for both platinum and palladium, but they don’t always move in lock-step. Palladium is a 100-troy ounce contract. View contract specs.
If you are looking to diversify out of gold and protect yourself against the potential for inflation given all the money that is being printed throughout the world, silver, platinum and palladium are good markets to consider. If you would like more details on specific trading strategies, or have any other questions about the futures markets in general, please feel free to contact me.
Aaron Fennell is a Senior Market Strategist and Chartered Financial Analyst based in Toronto with Lind-Waldock, a division of MF Global Canada Co. He is accepting clients from Canada and can be reached at either 877-840-5333 or 416-369-7933, or via email at afennell@lind-waldock.com.
The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. Please carefully consider your financial condition prior to making any investments. Not to be construed as solicitation.
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