Gold a much safer bet than platinum

Gold is set to widen its premium over platinum after hitting parity for the first time in two-and-a-half years this week, with no end in sight to the potent cocktail of fear factors that are benefiting safe havens at the expense of cyclical assets.

Gold prices rose above those of platinum for the first time since December 2008 late on Monday. The last time this happened, the situation reversed within a few days, and traders said then that the convergence of the gold-platinum ratio gave a clear signal to sell gold and buy platinum.

Now, says Michael Widmer, an analyst at Bank of America-Merrill Lynch, the picture is different.

"Gold as a defensive asset is being driven higher at the moment by risk aversion, and platinum, as a cyclical asset, is under pressure because growth is slowing.

"We were there around the great recession [2008], and then you had the various stimulus packages hitting the market, and you saw the prices of the two metals starting to diverge again. The macro picture is a bit different this time around. I don't think that it is a compelling trade," Widmer says.

In contrast to the situation in 2008, gold's premium to platinum is a function of its own strength, rather than of a falling platinum price.

Gold hit a record $1778.29/oz this week as concerns over economic stability and debt crises in the eurozone and the US sparked heavy buying among investors.

Platinum prices have eased by just over 2% this year, although they have not dropped in the same way as some industrial metals, such as copper, which is down 8.2% in electronic trading.

Although platinum is nominally a precious metal, the bulk of its demand comes from the industrial sector, particularly car manufacturers, who use it to make catalytic converters. Platinum is therefore more sensitive to threats to growth. This might mean it still has some way to fall, potentially further widening its discount to gold, analysts say.

In 2008, platinum plummeted from record highs to below the price of gold, says Deutsche Bank analyst Michael Lewis.

"Now, this parity has occurred and we haven't priced in that recession risk yet. There is more risk that if we get negative data, it could sustain that discount of platinum for a longer period of time."

A short-term reversal in the ratio is possible. The current rush for safety, sparked by Standard & Poor's decision to downgrade the US credit rating on Friday, has sparked a 6.3% rally in gold prices in the past two days alone, the biggest two-day rise since 2008.

That kind of jump has typically been followed by a correction, as was seen in late April after gold's initial break above $1500/oz.

At the same time, there are factors that could suggest a short-term rise in platinum prices as the threat of strike action by miners in South Africa, the source of four out of five ounces of the world's platinum supply, continues to loom.

But any possible reversal in the fortunes of gold and platinum are likely to be brief, with the wider economic picture still overwhelmingly pointing to continued appetite for so-called havens.

"If you look at the platinum group metals and other industrial metals as well as oil, it is all a one-way street - down," says Afshin Nabavi, head of trading at MKS Finance. "Gold and the Swiss franc are really the only safe havens."

In the longer term, gold will undoubtedly correct at some point, with a rise in US interest rates expected to be its turning point.

Meanwhile, platinum's underlying supply fundamentals still point to higher prices as South Africa's mining sector faces stronger cost pressures from an increased focus on safety, rising inflation and higher wage demands.