Responsiveness of Platinum and Gold
While we might think that all this volume that we see in gold would make gold move much more than platinum would when these metals are in periods of accumulation or distribution, all of this is relative to their markets, so a big move in gold may involve a lot more money but the market is also much bigger as well, and we generally see the opposite effect, where moves in platinum involve far less money but move the much smaller market in more pronounced ways.
Instead of being a negative, the responsiveness of platinum, due to its considerably smaller market and much less involvement among huge institutions such as governments, is perhaps its most appealing feature.
A much bigger portion of the platinum that is out there is used for non-investment purposes, and even though we do use gold for things like jewelry and electronics, and quite a bit of it goes to these purposes, the portion that is used for investment is larger on a percentage basis than the amount of platinum used for investment.
We would think that this would add stability to the price of platinum and make it less volatile, because the market for industrial uses of a metal is based upon a demand that doesn’t change very quickly, nor does the supply of platinum. As it turns out, the smaller side of platinum, the investment side, does drive the price a lot.
Investing in a precious metal like gold or platinum can change quite quickly as this is primarily driven by sentiment, for instance by the fear that drove financial markets into decline during 2008.
Although the prospects of a recession certainly isn’t good for a metal that is primarily used for industrial purposes, this does not even begin to explain why the price of platinum dropped by almost two thirds in just a few months like platinum did.
Investors selling platinum in droves in a panic is a sufficient explanation though, and this is a perfect example of how responsive platinum actually is to investor sentiment, and while gold did shed about $100 an ounce during this period, this was nothing compared to platinum losing over $1200 an ounce during this time.
This is an extreme example of the greater volatility of platinum over gold, and both metals did well after they rebounded from the initial shock of the Great Recession, but this does show that we can’t just say that gold is more popular and people tend to run to it or flee to it a lot, so therefore gold is more responsive to changing landscapes.
Both precious metals are pretty volatile, but platinum is at least a bit more so, and the reason is when the bigger money starts to move it has a bigger relative impact upon the market than we tend to see in gold, where people tend to be more disposed to hold on to it than with those holding platinum, which is seen as more speculative by people.
Platinum, Gold, and Risk Management
This means that while we need to be careful with all precious metal investments, we need to be particularly careful with platinum, more so than with gold. Platinum tends to drop in price faster generally, and we call this investment risk, and whenever something has more risk we need to be more careful in managing this risk.
Risk management is given pretty short shrift with precious metal investing in general though, and this is the bigger issue here by far than relative comparisons between the risk profiles of gold versus platinum.
A lot of people tend to operate under the illusion that gold or platinum, especially gold, not only is not that risky, it may offer us a way of mitigating risk. While this is true under conditions of proper asset management and allocation, this does require us to be diligent in managing our positions in precious metals, and a lot of people do quite the opposite, they don’t manage them very well if at all and this isn’t even much of a concern to them.
People manage their stock positions this way as well generally, where they only may become concerned about risk after suffering massive losses. This tends to be the case with gold and platinum as well, for instance those who held platinum and saw it go from over $2000 an ounce to below $800 in just 5 months, which may or may not triggered their threshold of fear to have them selling at a huge loss.
For those who hung on, they may have patted themselves on the back as they saw the price rise back up to around $1800 over the next couple of years, with those who did sell near the bottom in a panic beating themselves up over this.
Proper risk management though requires that we have a good plan in place to look to prevent our entering in situations that involve taking on excessive risk in the first place, which would have us out of these markets once a decline hit a certain threshold, well before we want to pull our hair out.
Once things are safe enough to re-enter, if we’re limited to just the long side of these investments, that’s when we get back in. This is not a strategy that is employed anywhere near enough by individual investors investing in anything, but with things like platinum and gold, the risks are higher and this requires us to be even more vigilant in looking to manage these risks in a way that at least has a semblance of order and planning.
This requires us to implement objective standards of management, clear rules where we will exit and re-enter our positions, and not simply having us rely on things like degrees of concern or fear which we manage as we go along. In this respect, our approach to investing in either gold or platinum , for a great many of us, requires more thought.
Assessing the Individual Markets of Platinum and Gold
Whether we invest in platinum or gold or something else always needs to come down to the particular desirability of the asset at present. Both platinum and gold have a good potential to deliver a very good rate of return generally, but this all comes down to how well we time these investments to look to take advantages of changes in their markets without exposing ourselves to excessive risk or losses.
The gold market does tend to perform in a more orderly fashion than platinum does overall, meaning that it is often at least a little easier to predict trends. This does depend a lot on the circumstances though, and we need to look at both, and there are times where platinum is proceeding more orderly and may also offer a bigger return on investment over a given period of time.
If one is seeking out longer term time frames with precious metal investing, gold would be the better choice, as its discernible runs in both directions tend to play out over longer time frames than platinum does without such wide pullbacks that platinum is more prone to.
It is not enough to simply look at a price in the past and compare it to today’s price and assume that if you just hung on to it over this time you would realize a certain profit. It’s also important to look at the way it moved over this time, especially if the price moved against you by significant degrees along the way, as you may not have been able to hold it all this time nor may it have even be wise to do so.
It is pretty challenging to manage long term precious metal investments in general, and even more so with platinum, with the way its price tends to move around. Market timing is at a premium with precious metals, and even necessary, and it’s even more needed with platinum than with gold, although the differences here aren’t as significant as people tend to think, because both are in real need of this.
We may also want to invest in both platinum and gold, and put more money in one over another depending on how each market is behaving. While we may think that this strategy offers the benefits of diversification, these particular benefits are minimal at best, and what we’re really after is to be putting ourselves in a position to speculate more at times where the potential benefits of this speculation is high enough, and holding off when it things are less likely to be profitable enough.
Platinum and gold are similar in many ways, with only a few important distinctions, and both can be speculated upon successfully provided we have the skills to do so well.