Gold’s golden moment dazzles better-value rivals

Gold is having a golden moment as investors fret about runaway prices and the stability of the US dollar. Adjusted for inflation, gold has risen above its previous peak in early 1980, after which its value declined in nominal terms for nearly two decades. The precious metal now trades at more than three standard deviations above its long-term trend. Although gold has retained its purchasing power over several millennia, it has proven a relatively poor hedge against inflation over the shorter term. After a 25 percent increase this year, it has never looked more expensive, both in real terms and relative to other commodities.

"The real price of gold," writes,  Campbell Harvey of Research Affiliates, "resembles a price-earnings ratio for equities. Very high P/Es are often followed by low expected returns. Gold's historical record suggests a similar pattern." Since 1975, investors who acquired gold at elevated prices lost money over the following decade. Conversely, buying gold when it was relatively cheap delivered positive inflation-adjusted returns.

Today its price is far out of line with several other commodities. Over the past half-century an ounce of gold has, on average, cost 21 times the price of a barrel of oil. Today, the gold/oil ratio is above 50 times – its highest-ever level apart from a brief moment in 2020. Gold also looks expensive relative to silver. Since 1975, on average, you could exchange 60 ounces of silver for an ounce of gold. Today, gold is worth around 100 times more than its cheaper cousin.

There's another precious metal that looks even less expensive. Platinum may not have the allure of gold but is much harder to find. Global production is mostly concentrated in deep mines located in a small region of southern Africa. Platinum has been on a roller-coaster in recent years. In the first decade of the century, the metal was caught up in the mining supercycle when it boomed and then crashed. Mine production was interrupted during the pandemic after which platinum climbed above $1,200 an ounce in the spring of 2021. Since then, it's fallen below $1,000. In real terms, platinum currently trades roughly 25 percent below its 50-year average.

Since 1900, the price of platinum has proved stable relative to gold, according to Bryan Taylor, chief economist at Finaeon (formerly Global Financial Data). Over the past 50 years, the ratio of gold to platinum has on average been about par. Since 2015, however, gold has pushed ahead and now trades at three times the price of platinum. Relative to gold, platinum has never been so cheap.

The significance of these comparisons is a matter of judgment. After all, gold is considered by many to be an alternative to unstable paper currencies. Although silver and platinum are officially designated monetary metals they lack the strong brand of their yellow rival.

Successive US presidents have threatened to undermine the current international monetary system dominated by the US dollar. After the United States and its allies froze Russia's foreign exchange reserves in 2022, China and other central banks stepped up their purchases of gold. On several earlier occasions when international monetary regimes collapsed, gold underwent a paradigm shift.

For instance, when the gold standard collapsed in the early 1930s, its official price was raised from $20.67 per ounce to $35. After the post-war Bretton Woods system of fixed exchange rates crumbled in the late 1960s, gold became extremely volatile but settled at a higher average price, in real terms. Looking further back in history, the demonetisation of silver in Western industrial economies during the second half of the 19th century permanently lowered the market value of silver relative to gold.

Gold may be in the early stages of yet another paradigm shift. Furthermore, while the yellow metal benefits from economic uncertainty, industrial commodities are vulnerable to a global downturn. At the start of the pandemic in 2020 oil futures briefly turned negative. Around half of the annual production of silver goes to industrial applications, while three-quarters of platinum demand comes from industrial users. If the global economy turns down these commodities will surely take a hit.

There's another threat to consider. So-called platinum group metals, which include palladium and rhodium, are prized for their ability to withstand high temperatures. Around 44 percent of platinum production is used in auto catalytic converters that reduce pollution produced by internal combustion engines. Government targets to end the sale of traditional motor vehicles threaten the long-term demand for oil and for platinum and its related metals, which are not used in battery powered electric vehicles.

Outside of China, however, the rapid advance of electric vehicles has stalled. Last year, the German government ended subsidies for electric vehicle purchases. Trump has torn up his predecessor Joe Biden's target for half of all US car sales to be electric by 2030. Plugin hybrid electric vehicles have been gaining market share. These use more platinum group metals than petroleum and diesel vehicles. UBS, which last year reduced its forecast for global penetration of battery electric vehicles by 2030 from 50 percent to 40 percent, expects demand for platinum group metals to remain stable over the medium term.

Impala Platinum, one of the largest miners of the ore, reports continuing "robust" demand from its customer base. The supply of these rare metals, on the other hand, is increasingly constrained.

In recent years, platinum miners have dramatically under-invested, according to Django Davidson of Hosking Partners. They have little incentive to invest since many of their operations are unprofitable at current market prices. The World Platinum Investment Council states that the supply of platinum undershot demand by 17 percent in 2024 and expects the supply deficit to continue over the coming years.

The recent parabolic price movement suggests that gold could be in a bubble. Speculators may continue to make money in the short run. But investors seeking to protect their wealth over the long run should look elsewhere. Relative to gold, oil and silver look extremely cheap. Platinum might be said to be in an anti-bubble. Depressed both in price and supply, this rarest of metals looks a better store of value than what John Maynard Keynes famously called the "barbarous relic".