September 18, 2020
Whenever we think of raw materials, the first thing that comes to mind is gold and sometimes silver. However, other commodities offer the same, if not more, diversification benefits. Platinum is a market to consider because it offers diversification benefits similar to those of gold.
In addition, the direct historical correlation of 0.7 between platinum and gold allows it to be added to a portfolio and to have a different effect than gold. A correlation of 1 means that the two markets are positively correlated and zero reflects no correlation. Therefore, if an asset has a correlation of less than 0.5, it makes sense to add it to a portfolio.
Therefore, it makes little or no sense to add platinum to a portfolio that is already diversified with gold. However, before adding gold to a portfolio, it is a good idea to consider platinum as well.
What are the drivers of the platinum market?
Like any commodity market, the platinum market is driven by supply and demand. Industrial breakthroughs and innovations are responsible for changes in the supply and demand of raw materials. In the case of platinum, it is at the heart of the hydrogen economy, as it is used to produce green hydrogen and for fuel cell electric vehicles.
Climate change is a reality, and many developed countries have devoted significant funds to green projects. The European Union is a good example of this, with the EU’s “Green Deal” to reduce CO2 emissions by 50% in the coming years – an ambitious program for which funding has already been approved. Such results can only be achieved through structural and industrial changes, and the commodities to facilitate these changes will be in high demand. Platinum is one such commodity.
From an investment point of view, platinum offers the same risk coverage as gold. However, historically, it has outperformed gold in times of financial difficulty. For example, during the great financial crisis of 2008, platinum’s weekly returns exceeded those of gold by more than 30%. As a result, more gold investors may consider platinum as a substitute for gold, as suggested by the correlation mentioned at the beginning of this article.
The commodity market is not only made up of gold and silver. Investors willing to bet on new technologies and the rise of green trends should consider platinum for their long-term portfolio. Because it also offers diversification benefits to a portfolio, platinum represents a viable alternative to gold.