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Madness in the Metals: What Will 2020 Bring?

Topic: Gold , Commodities
Publication Type: Investment Cases
Madness in the Metals: What Will 2020 Bring?

The past year offered favorable dynamics for gold, even amidst the continued bull market for equities.  Between oscillating trade tensions, loosened monetary policy and falling bond yields, gold rallied roughly $235/oz. while also moving counter-cyclically during periodic bouts of market stress.  Indeed, this characteristic lends the capacity to improve Sharpe ratios and risk adjusted returns. 

But is it at this point that the story of diversification ends? Perhaps examining the platinum group metals can bring more context to the narrative on diversifying investment returns. Notably, these metals combine a hard asset store of value characteristic with dynamic return histories.

Mission Accomplished? Not Quite…

One of the prime rationales for a gold allocation is introducing an uncorrelated driver of returns to stock and bond exposures, two fundamental building blocks for most standard portfolios.  The challenge is, for many investors the search for diversifying assets begins and ends with gold, when there exists an entire ecosystem of precious metals just over the horizon. 

Read More: Your 60/40 May be Broken, But Not for the Reasons You May Think

This category of alternative diversifiers, of course, is the platinum metals group encompassing palladium, platinum and rhodium.  Despite each of these assets being subject to their own macro and micro economic trends, even dedicated investors may find these metals just beyond the cusp of their knowledge base, and simply because they fall outside standardized models.  The real question however, is when equity markets are at all-time highs, are investors leaving potential diversification on the table heading into 2020?

Notice the pattern? Precisely–there is not one. Source: Bloomberg, weekly returns from 12/31/94 to 12/31/19

Powerfully, each of the platinum group metals is uncorrelated not only to the market, but to gold as well, illustrating the capacity for incremental diversification gains.  The charts above depict the weekly movements of these metals against gold over the past 25 years — since 1995—and the results show the dramatic independence of these assets.  Indeed, the globular nature of the returns on these charts just how weak of a pattern exists, and that bodes well for diversifying potential.  From left to right, gold movements only explain 27% of platinum returns, 9% of palladium returns, and just over 1% of rhodium returns; the rest is new exposure.

New Metals, New Potentials

Often times non-correlating assets are presumed to be rather unengaging, but the platinum group metals may clearly buck trend.  Over the last four years, an equal-weighted basket of these three platinum metals rallied 251%, all while remaining uncorrelated to both stocks and bonds (correlations of 0.165 and 0.013, respectively).  Let’s examine the factors driving returns for these assets to see if investors may find additional value in diversification.


As an asset with a history serving as a store of value and even monetary currency, platinum is similar to gold but with prolific commercial applications. Over 60% of platinum consumption is driven by industrial demand, ranging from medical pacemakers to the production of iPhone screens.  When only 16% of gold use stems from industrial demand, platinum’s diverse ecosystem of applications help establish independent asset returns.  In fact, platinum outperformed gold in 2019, rallying 21.5%, but notability, 83% of these returns are attributable to other factors and exposures.

The most effective way to manage risk may be to embrace different kinds of risk–the cornerstone of diversification.

Another defining characteristic of platinum is its scarcity, with the metal representing only five billionths of the Earth’s crust—over 10 million times rarer than titanium.  Moreover, platinum remains historically inexpensive by almost any metric, even after last year’s rally. For instance, over the last 30 years platinum has traded at a 32% premium to gold, but this alternative diversifier is currently priced at a more than one third discount to gold.


Having spiked no less than 10 times in 2019, and even testing the $2000/oz. level last December, palladium is no stranger to dynamic price action.  More than tripling in price over the last three year and a half years, the key catalyst to this trend is the catalysts themselves, the auto-catalysts that is.  Depending on make and model, between three to seven grams of platinum group metals are used catalytic converters of passenger automobiles, which work to ensure the complete combustion of emissions.

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Critical is the market substitution effects between platinum and palladium, both widely consumed in this application.  At current prices, an auto catalyst that uses exclusively palladium may require between $180 and $430 of precious metals; switching to 50% platinum blend could reduce this bill by a quarter.  Nonetheless, platinum has yet to see the upward movement that has defined the latter’s multi-year trend, creating a potential upside opportunity.  After all, mean-reversion may be one of the most time-honored rules of finance.


Best known for its role as the plating in white gold, this metal is perhaps the most exotic of all. In fact, the asset does not even trade on the London Metals Exchange, nor has it been financialized in U.S. markets with exchange traded funds. As rare as platinum is, rhodium is an additional 5 times more scarcely produced—only 30 tons annually. 

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Given its scarcity as well as its role in the auto-catalyst market, rhodium has witnessed dramatic movements.  The asset is up nine times in the last three and a half years, yet strikingly it remains roughly 40% below its all-time high of $9,725/oz.  For investment purposes, rhodium may not be for the faint of heart, but its idiosyncratic return profile may help add new exposures to portfolios when used in small allocations.

Going Beyond Gold

Each of these three assets exhibit strikingly uncorrelated returns, the essential characteristic for effective diversification.  The simple reality is that many investors may rely on only two fundamental factors for diversification: equity risk and interest rate risk.  While adding gold is commonly used to broaden a portfolio’s horizon, the critical question is whether using platinum group metals may offer further diversifying potential.  Quite simply, why rely on only one asset to diversify a portfolio when additional solutions may be readily at hand?

As financial markets continue to evolve, finding assets that are truly independent becomes increasingly complex.  This is the potential for including platinum metal groups into a broader portfolio, augmenting a gold exposure. Not only are these assets uncorrelated with stocks, bonds and even gold, but they are also independent of each other.  After all, the most effective way to manage risk may be to embrace different kinds of risk—the cornerstone of diversification.

Diversification does not guarantee a profit or protect against loss. Past performance may not be indicative of future returns.