Platinum still a relatively good bet

Platinum prices have been dragged lower in the last month or so and are over 11% lower than levels seen in August.

This doesn't appear to have much to do with any change in the S&D fundamentals for platinum and has much more to do with the weakness in gold prices. The platinum to gold ratio hasn't changed too much since the middle of year, although is up along way from the sub 1 level seen at the start of 2013.

While traders seem happy to peg platinums movements with gold for now its clear that weaker pt prices have generated a different reaction from investors to falling gold prices.

For example, while physical gold ETFs have seen massive outflows, the opposite is true from platinum.

Some of this may just be the timing of new products becoming available in South Africa rather than a reaction to lower prices.  But the investment rationale for them makes sense if they believe prices should rise because miners a failing on the cost management and production front.

Also, Chinese interest in platinum is up strongly, much like it is for gold.  Cumulative sales on the Shanghai gold exchange, which accounts for a large portion of Chinese apparent demand, is up almost 40% YoY YTD.

Curiously, Johnson Matthey has very conservative estimates for Chinese consumption this year at just an extra 100koz over 2012. Perhaps they see the frenetic SGE buying activity as stockbuild, which could be a big problem for 2014.  But it seems more likely JM have underestimated parts of the market.  To be sure, jewellery retailing is up 28% YTD in China, it seems unlikely that platinum has missed out.

So what does this mean for investing in platinum? The fundamentals are not bad, but the prospect of a weaker gold price may scare many from being long.

The better bet seems to be going long platinum, short gold.  That trade has already been a winner this year, with the pt:au ratio rising over 20%.  And there is no reason why it can't rise further given the relative fundamentals, particularly given the relative risks to prices and S&D dynamics.