Investors and analysts have a wide variety of different ratios that they focus on to get a better read on the market. Some like to look toward the S&P 500/gold ratio while others find solace in P/E figures. However, there is one lesser-known metric that has its roots firmly planted in the commodity world. The platinum/gold ratio is a precious metals combination that many use to gauge how markets are performing. While it may sound a bit unorthodox at first, there is sound reasoning behind watching this comparative metric [for more precious metals news and analysis subscribe to our free newsletter].
The ratio pits the price of platinum versus that of gold, and is movements can often signal coming economic trends. The higher the ratio, the more economic bullishness that is expected. “There is a logical reason for this: Platinum is more rare than gold, so it usually trades at a premium to the yellow metal. When economic worries increase, however, the platinum premium to gold tends to get squeezed as investors seek gold’s perceived safety” writes Michael Tarsala. Also note that platinum is a far more useful metal in the industrial world, so a decline in the white metal often signals bearish sentiment for the industrial sector as well as the broad economy.
For much of 2012, this ratio has been steadily declining, leaving a cause for concern for many investors. Obviously the announcement of QE3 shook up the numbers a bit, as the precious metals world felt a nice boost from the open-ended easing, but despite the jump in the ratio over the past few weeks, its weak 2012 performance demands a closer look from investors who value its measurement methodology. Below, we outline three ETFs to help you invest in these two precious metals and make a play on this economic indicator [see also Technical Alert: Silver Makes Golden Cross].
This article was originally written by Jared Cummans, and posted on CommodityHQ.