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When Precious Metals Sink, Spread Investors Look for Relief



Precious metals slump

Platinum and palladium are rare precious metals compared to the more famous gold and silver. Platinum and palladium each derive value from industrial uses. Palladium has historically been cheaper than platinum and so has come to be used as an alternative to platinum over time.

With the rout experienced by commodities in the past month, platinum and palladium have fallen ~18% and ~24%, respectively. Meanwhile, gold and silver have fallen ~7% and ~2.5%, respectively.

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With the disappointing performance of these precious metals, investors should consider the spreads. The gold–silver spread settled at $72.4008 on August 10, having fallen by 1.89%. The gold–platinum spread and the gold–palladium spread also declined by 1.38% and 0.62%, respectively. The chart above shows the performance of the gold–platinum spread compared to the gold–palladium spread.

The gold–platinum spread

The gold–platinum spread represents the number of platinum ounces per one ounce of gold. Gold prices are currently higher than platinum prices, which hasn’t always been the case. The spread of $1.1201 indicates that we need 1.1201 ounces of platinum to buy one ounce of gold. If you’re long on the spread, you’re optimistic about gold, because you’ll profit if the spread rises further, and it takes even more ounces of platinum to buy one ounce of gold.

Similarly, the gold–palladium spread represents the number of palladium ounces per one ounce of gold. Gold prices are higher than palladium prices, and the spread is $1.8088, meaning that we need 1.8088 ounces of palladium to buy one ounce of gold.

Miners take on the precious metal

ETF holdings have been deeply affected by the current rout, as volumes have decreased significantly. The Direxion Daily Gold Miners Bull 3x ETF has fallen by 44.44% on a 30-day trailing basis and by a whopping 66.4% on a year-to-date basis. The ProShares UltraShort Silver Fund (AGQ), a leveraged ETF, has fallen by 4.73% on a 30-day trailing basis and by 10.54% on a year-to-date basis.

Mining companies aren’t being spared. The declining US dollar and liftoff expectations have dragged gold prices further south. Royal Gold (RGLD), Eldorado Gold (EGO), and Iamgold (IAG) have fallen 14.41%, 5.71%, and 9.84% on a 30-day trailing basis.

Meanwhile, August 14 proved to be a good day for mining companies and for the VanEck Vectors Gold Miners ETF (GDX), which rose by 3.45%. The most-loved gold ETF, the SPDR Gold Trust (GLD), rose by 0.58%.


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