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The Platinum Investment Case

September 21, 2020 By Mircea Vasiu

Whenever we think of commodities, the first thing that comes to mind is gold and, sometimes, silver. However other commodities also offer the same diversification benefits, if not more. Platinum is one market to consider, as it offers similar diversification benefits as gold does. 

On top of that, the platinum and gold historic direct correlation of 0.7 makes it possible to add it to a portfolio and have a different effect than gold does. A correlation of 1 means that the two markets are positively correlated, and zero reflects no correlation at all. Hence, if an asset has a correlation below 0.5 it is wise to add it to a portfolio.

Therefore, it makes little or no sense to add platinum to a portfolio already diversified with gold. However, before adding gold to a portfolio, it is worth considering platinum, too, before picking one.

What Drives the Platinum Market?

Like any commodity market, the platinum market depends on supply and demand. Industrial breakthroughs and innovations are responsible for changes in supply and demand for commodities. In the case of platinum, it sits at the core of the hydrogen economy as it is being used at generating green hydrogen and for fuel cell electric vehicles.

Climate change is a reality, and many developed countries directed important funds towards green projects. European Union is a great example, with the EU Green Deal aiming at cutting CO2 emissions by 50% in the years ahead – an ambitious program that already has funding approved. Such results can only be obtained by structural, industrial changes, and commodities to facilitate such changes will be in great demand. Platinum is such a commodity.

From an investing point of view, platinum offers the same hedge for risk as gold does. However, historically, it outperformed gold during times of financial distress. For example, during the 2008 Great Financial Crisis, platinum’s weekly returns outperformed gold by more than 30%. Therefore, more gold investors may consider platinum as a proxy for gold, as the correlation mentioned at the start of the article would suggest.

The commodity market is not made up only by gold and silver. Investors willing to bet on new technologies and the rise of green trends must consider platinum for the long-term portfolio. Because it also offers diversification benefits to a portfolio, platinum represents a viable alternative to gold.