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A Great Time to Buy This Metal
Platinum is dirt cheap, at least relative to gold. That's just one reason why this white metal is a "Buy."
As the chart below shows, the price of platinum has fallen below the price of gold. This rare divergence started in the middle of March and widened by the end of last week. Gold ended the week at $1,202.50, while platinum was $50 cheaper, at $1,154.80.
Just based on geology, this relative pricing is strange: Platinum is about 30 times rarer than gold in the Earth's crust. Also, annual platinum production from mines is about one-sixteenth that of gold. You might think something that rare would cost more. But that's not the case, at least not at the moment.
Furthermore, supply/demand data also suggests that platinum should carry a much higher price tag than gold. Platinum is mostly used in automotive catalytic converters for diesel vehicles, with industry accounting for more than 50% of total demand, according to analysts at Johnson Matthey. That compares with only about 10% for gold.
Nevertheless, despite this robust demand for platinum and despite its scarcity relative to gold, it is gold that is currently the most "precious" of these two precious metals.
But this pricing anomaly doesn't make platinum NOT precious. And tight supply gives this metal the potential for a rocket-ship move.
While it's no guarantee that the platinum price will rise, I think the odds are in your favor. Here are three reasons why...
Reason No. 1: The Ongoing Platinum Deficit
Global platinum supply was in deficit last year to the tune of around 700,000 ounces, the fourth year of a supply/demand deficit. This year, mined production will increase 11.5% (from 5,200 troy ounces to 5,800 ounces). But even with the rise, this year's global platinum mine production will still be slightly below 2013's. And platinum demand should STILL outstrip total supply this year by about 3%, or 235,000 ounces.
So that means that the world will use up stockpiles. Aboveground stocks fell 20% last year, and there is estimated to be about two months' supply floating around. But that also means it won't take much of a disruption - or a change in the supply/demand balance - to eat up those inventories.
The supply/demand deficit in platinum is expected to last at least through 2018, according to Deutsche Bank. That's a long time in which nothing had better go wrong with supply.
Reason No. 2: More Demand
Projected demand for platinum is rising about 3% year over year. Again, half of platinum is used for catalytic converters in diesel automobiles. Europe is where most diesel vehicles are sold. And auto registrations rose 5.4% last year. Europe's weak economy seems to be rebounding, which could light a fire under platinum demand.
While about 40% of the platinum used for vehicle catalysts each year can be recovered, a lot is just used up.
On the jewelry side, we should look to the big jewelry consumers of China and India. India in particular, in February and March, saw platinum jewelry demand pick up. Why? Because the price of the whitest of metals fell below that of gold, and bargain-savvy Indian consumers know a deal when they see one. According to platinum jewelry retailers in India, demand for platinum shot up between 40% and 50% during the months of February and March.
Reason No. 3: South African Supply
The vast majority of platinum comes from South Africa. Last year, South African miners took part in violent protests over wages. The strikes temporarily drove up the price of platinum, but prices fell hard (by about 12%) after the strikes ended.
Now, there is a new threat from South Africa: its 26% rule. That law states that in the interests of "black economic empowerment" (BEE), black interests in the country must control at least 26% of South African mining firms.
The problem is miners achieved 26% black ownership for a short period - then slipped back below the threshold percentage after BEE shareholders sold their equities in the companies.
Mining firms contend that such selling is beyond their control. And that they should be considered to have met BEE obligations so long as they initially come in above the 26% threshold - regardless of what happens to shareholdings afterward.
Guess what the government says? The government has a different point of view and says miners should be required to maintain 26% BEE ownership at all times.
If the government view is upheld, the miners will have to keep issuing shares, diluting their already paper-thin profit margins.
Some South African miners are already operating in the red, hoping against hope that prices will improve. If the South African courts uphold the government's ruling on the 26% rule, I wonder how many of those miners will pack it in.
How You Can Play It
There are some good platinum miners. But at this time, the best way to play platinum is through one of the platinum ETFs. And the most liquid of those is the ETFS Physical Platinum Shares (NYSE: PPLT).
Or, if you are the kind of investor who does not like buying precious metals, then consider a pairs trade: Buy platinum; sell gold. In other words, for every $1,000 worth of ETFS Physical Platinum you buy, sell short $1,000 worth of a gold ETF like SPDR Gold Shares (NYSE: GLD). With a trade like this one, you don't care whether the platinum price moves up or down, you care only that it moves up relative to gold.
If gold and platinum prices merely returned to where they were one year ago, this trade would gain nearly 20%... or if the two metals returned to their 2011 prices, this trade would gain a whopping 50%.
One way or another, platinum is a "Buy."
All the best,
Sean Brodrick
for Free Market Café
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