For many months, I have witnessed a trend towards resource nationalism which is taking a major toll on the potential supply of platinum (NYSEARCA:PTM) where over 90% comes from South Africa, Zimbabwe and Russia. These are far from safe mining jurisdictions. Simultaneously, auto sales are rebounding to levels not seen since before the credit crisis in early 2008.
Despite global supply concerns, increase of resource nationalism and rising industrial and automobile demand, platinum is still undervalued compared to gold (NYSEARCA:GLD). The platinum price is still far below pre-credit crisis highs, while gold and silver (NYSEARCA:SLV) are almost double 2007 highs. This may be a short-term phenomenon and over the long term PGM's may provide a great buying opportunity and catch up to gold (NYSEARCA:IAU) and silver (NYSEARCA:AGQ).
Over 90% of platinum (NYSEARCA:PPLT) supply originates from South Africa, Zimbabwe and Russia. Zimbabwe has recently nationalized the assets of Zimplats. This could have a major impact on potential supply and may increase interest for advance platinum assets in geopolitically stable mining jurisdictions.
Right now, platinum may be undervalued to gold as it is 30 times more scarce and has averaged historically to be at least double the price of gold. Likewise, many of the platinum junior equities are deeply undervalued even compared to the bargain basement junior gold miners (NYSEARCA:GDXJ).
This undervaluation may be due to the fact that currently the PGM market is much smaller than gold and lacks major institutional coverage. This may change as major investors and large platinum miners look to diversify into more stable areas such as the U.S. and Canada.
Over the long term, these development-stage companies could be rerated as more funds enter the arena and as the public becomes more aware of the potential supply shortfall. Since high quality platinum projects are rare, once institutional and retail money comes into this sector it could cause a valuation jump in these assets.
We may be witnessing the genesis of that move as the platinum price breaks out versus gold and as the 200-day begins to slope upward for the first time in several years. Recently, we have seen increased financial interest in the PGM space with one platinum miner Platinum Group Metals (NYSEMKT:PLG) raising over $180 million. This company has soared since the financing closed in early January. Many expect more institutions to invest capital into this space after seeing this recent success.
I have always believed in diversification across the metals space and include platinum and palladium (NYSEARCA:PALL) in one's portfolio. Since October, I have been writing to watch for the platinum group metals to outperform. Unlike gold, the white metals, platinum, palladium and silver can be used as an alternative currency, but it is also consumed in industry.
Supply of platinum and palladium comes from unstable jurisdictions dealing with resource nationalism, labor protests and high costs. Many of the South African producers are losing money at these price levels. Miners risk their lives going into the deepest underground shafts in the world.
Platinum and palladium demand is rising sharply especially for their use in catalytic converters used in automobiles as to reduce smog and noxious emissions. Countries are combating air pollution with increasing regulations on car manufacturers.
Look for advanced platinum deposits in stable jurisdictions. They are very rare and should be in great demand as the price for platinum and palladium breaks out.