Platinum And Silver Valuation And Volatility

Posted 19 May 2010

Platinum has become an increasingly attractive asset for my portfolio. Despite the increased volatility I think this noble metal still presents an excellent opportunity to deploy capital into. The initial buy platinum recommendation was in July 2009 around $1,118 and was reiterated in January 2010 around $1,618.

As general economic conditions have the appearance of recovery, elections are coming up after all, the demand for both silver and platinum will likely increase. Governmental purchases for the green economy will put further strain on the physical market.

Gold, silver and platinum, unlike little colored coupons, cannot be produced by a bald monkey pushing buttons on a computer that add digits to a database on some server. Additionally, almost all the monetary and mind calming reasons an investor would desire to hold gold also apply to silver and platinum.


Many academicians propound the efficient market hypothesis which asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made.

[pullquote]If I do not feel comfortable owning something for ten years then I do not own it for ten minutes within which it can lose ten percent of its value.[/pullquote]There is a funny joke that those who cannot do teach. I am of the opinion that money is made when you buy not when you sell.

The goal is to buy when cheap and sell when expensive. The omnipresent inefficiencies in the market allow this to happen. Based on the premise of information asymmetry the market is always 'irrational' under the efficient market hypothesis because of the economic calculation problem. After all, how many people continue to dispute the gold price suppression scheme?

As Mr. Robert Landis, a Wall Street veteran and Harvard trained lawyer has asserted, "Any rational person who continues to dispute the existence of the rig after exposure to the evidence is either in denial or is complicit."

The information may be available but because of emotional, psychological, etc. reasons individuals may engage in human action completely contrary to the 'rational' choice.

I suppose some people could stare at the noonday sun and proclaim 'What sun?' Large organizations are merely coagulations of individuals and when the choices are made without deliberation, skilled, calculated thought and in an irrational way then the system becomes more unstable and the more inefficiencies result. One symptom of these inefficiencies is increased volatility.

The increased volatility in the markets, stimulated this time around by the Eurozone credit crisis, can be particularly annoying and costly, in unrealized terms over short periods of time, for average investors.

For example, the 700 point drop in the DOW in under ten minutes is an example of the return of volatility that is primarily caused by High Frequency Trading and fake volume.


[pullquote]Horrible! Like lightning it struck. No one was prepared.[/pullquote]Perhaps I have a different perspective. If I do not feel comfortable owning something for ten years then I do not own it for ten minutes within which it can lose ten percent of its value.

To be honest, I derive greater utility from other activities than doting over a ten second chart. This is a reason I focus on passive income cash flowing assets; then I can clear my mind, swim with great white sharks, present at Cambridge House Investment Conferences on June 6-7 (hope to see you there!), swim with sperm whales, or a myriad of other hobbies.

So as you make decisions in life I think it wise that you able to explain why you are taking the job, making the investment, or whatever it may be. And if it can not stand applying pencil to paper then perhaps you should further deliberate and calculate on the decision. And if you can not write an intelligent answer to those questions then perhaps you should not make the decision. But no choice is a choice so what should you do in the meantime?

Because of the risks inherent in the banking system and because the little colored coupons are trending towards their intrinsic value, nothing, therefore I think it is prudent to eliminate both counter-party and payment risk where possible between myself and my capital. When you own a ton of gold, silver and platinum that is unencumbered in anyway then you can sit, deliberate and calculate decisions for a long time. In other words, I can remain liquid longer than the market can remain irrational.

Think about if you placed your capital in Euros deliberating what to buy? The Euro has gone from $1.512 or €798.87 per gold ounce on 3 Dec 2009 to €999.55 on 17 May 2010 or $1.227 on 19 May 2010. Four months and 25% of its purchasing power, POOF!

Unlike little colored coupons like Euros, Federal Reserve Note Dollars, etc. you can be assured that any of these metals will still buy at least something tomorrow morning. You need not fear some rapid valuation change like Harvard Professor Kessler recounted about Germany's Mark. "It was horrible. Horrible! Like lightning it struck. No one was prepared. The shelves in the grocery stores were empty. You could buy nothing with your paper money."

So, if you are in doubt about what to buy then why not make the stress free decision and buy gold, silver or platinum? You can always buy something else later and will probably have a clearer mind for the deliberation anyway. Will you always be able to buy more later? No, not necessarily. But you will always be able to buy something.


Buying gold perfectly serves the purposes of eliminating counter-party and payment risks. As do silver and platinum. So among these three competing currencies which is the cheapest?

Over the past few years silver has hovered around a ratio of 55:1 with gold while it usually takes about two ounces of gold to buy an ounce of platinum. In the extremes the silver to gold ratio can reach 16:1 and gold to platinum has reached as high as 2.4:1. Currently, silver to gold is about 65.6:1 and platinum to gold is about 1.34:1. In both cases, it appears they are undervalued relative to gold.

The volatility in the platinum market has been especially fierce lately. Some days the metal is up $75 per ounce while other days it is down $75 per ounce. As the fiat currency system continues its evaporation this type of volatility will wend its way into the much larger gold market. Beware of jumping on the trampoline.

So I think that platinum is particularly undervalued relative to gold. The increased volatility gives me opportunities to buy which I have been doing on a regular basis since I recommended it at $1,118.


But to be honest, I hate buying gold, silver and platinum. They sit in my vault, safe, buried under my favorite tree, etc. and do not increase in ounces. So why have I been buying platinum? Because I cannot find anything else worth buying.

While I am swimming with sperm whales, speaking at Cambridge House World Investment Conference or deliberating over the next investment I want to make the last thing I want to have cluttering my thoughts like a memory leak clutters my computer's RAM is the issue of whether my little intrinsically worthless colored coupons in a zombie bank still have purchasing power. Have you seen the FDIC failed bank list lately?

Just to put things in perspective. IndyMac had assets of about $32 billion and deposits of $19 billion and this mammoth failure cost the FDIC an estimated $8 billion. The seven banks that failed the week of 30 April 2010 had combined assets of about $25.8 billion and deposits of $19.6 billion. These failures cost the FDIC an estimated $7.33 billion. There are about $4.8T of deposits insured by the FDIC which has a negative $20.9B insurance fund balance. Annual worldwide platinum production is valued at about $7.8B. Got bullion?

DISCLOSURE: Long physical gold, silver and platinum with no interest the DOW, problematic SLV or GLD ETFs or the platinum ETFs or in the Angloplat, Impala Platinum (IMPJ.J), Lonmin and Norilsk Nickel (GMKN.MM) or Stillwater Mining Company (SWC).