Much has been made of the sudden and sharp drop in the price of gold recently. Economists, pundits, media, and market gurus alike have been debating the reasons behind the decline as well as attempting to rationalize where the price of gold fundamentally should stand. All of this rationalization proves to be difficult and subjective due to the fact that, aside from a small array of industrial and commercial uses that give gold "fundamental" value, the price at which gold trades hands is clearly primarily a "perceived" value. The lack of a true major industrial need for gold makes it difficult to value once its perceived value is shaken.
Due to its limited supply and historical measure of wealth, the yellow metal has gained much fame since 2009 as central banks around the world embarked on a money-printing spree that has seemingly picked up more steam in recent months. With the Bank of Japan's launch of a controversial quantitative easing strategy and the European Central Bank's key interest rate cut to 0.50%, money and credit are arguably more easy to come by than ever. Although it hasn't yet materialized, inflation remains a relevant concern to most market participants.
Now that the price of gold has stabilized, should investors renew their vow to hold it either physically or through an ETF (NYSEARCA:GLD)? If an investor's strategy is less about speculation, and more about hedging and wealth preservation, then I believe gold's less popular sibling Platinum (ETF: PPLT) requires serious consideration.
Overview of Platinum
Platinum is one of the rarest metals on the planet. Its physical attributes are superior to gold in terms of strength and the fact that is does not oxidize under any temperature. This makes it an extremely valuable material for industrial uses in vehicle emissions control, and medicine. And just like gold, platinum jewelry is highly sought-after, especially in countries like India.
I believe the investment merits of platinum are striking, not only from the perspective of capital preservation but also the potential for capital appreciation. In specific comparison to gold, platinum looks like an outright winner.
Ten reasons to consider a physical platinum ETF
#1- Supply/Demand - Despite the recent fall in the price of gold, a spot market value in the mid-$1400s is still some $500/ounce above average gold mining cost. This is a profit margin that continues to provide incentive for mining exploration and additional production. In comparison there is arguably no or little profit margin in the production of platinum, with both spot price and average production cost in the $1400-$1500 range. This situation will not sustain itself in the long term. If the market price of platinum does not increase, supply will be reduced. Second-tier producer Stillwater Mining Company (NYSE:SWC) has already rebalanced its operations away from platinum-group-metals in favor of increased gold assets. Supply cuts will eventually force the market price higher.
#2 - Increased Mining Costs - Platinum is mined in very few regions of the world, with the majority coming from a concentrated area in South Africa. As a result of this concentration, continued production of platinum is requiring deeper and deeper mine shafts (and by some measure also less safe) which result in increasing extraction costs. Higher costs to sustain the current production level of platinum will necessitate higher prices or slower production.
#3 - Scarcity - Platinum is an extremely rare metal. The annual rate of production in troy ounces is approximately 15x greater for gold than platinum. Furthermore, 2 years of gold mining produces more ounces than the total cumulative platinum ever mined. The substantial printing of money by central banks should impose greater monetary value for rare assets, and by any measure platinum is far more rare and being produced at a much slower pace than gold.
#4 - Labour Strife - Labour tensions at platinum mining operations in South Africa have resulted in numerous production shutdowns over the past few years, and in some cases violent confrontations. Although the resulting spikes in spot price have only been temporary, there is little evidence of an improvement in labour situations. Furthermore, there continue to be discussions about mining asset repatriation in the South Africa. These elements are a cause for production uncertainty, which is bullish for the price of platinum.
#5 - Cartel Talk - Recent reports have suggested that Russian interests in the platinum industry have run out of patience with persistently low profit margins, and want to see the establishment of an OPEC-like cartel on platinum mining.
#6 - Zero, or Negative Bubble - There is zero market-fanaticism for investment in platinum. It is rarely mentioned in the media except in some secondary comments related to gold. While the debate rages on about whether the gold market was a bubble or continues to be a bubble, there is clearly no bubble market for platinum. There are no cash-for-platinum television commercials, nor platinum-dispensing machines. Individual investors have little euphoria when it comes to platinum. The lack of hype means an investor is not paying for an overpriced fad. Platinum should suit those with a lower risk profile.
#7 - Money Manager Flows - Even many market experts are uninformed about the platinum market. To emphasize this point, at a recent professional investor conference nobody in a panel of three veteran economists/investment managers could say anything about the investment merits of platinum. Any acceleration in the understanding and visibility of the platinum industry could result in substantial new cash inflows from professional managers, especially if the perception of gold remains shaky. There is almost no risk of substantial cash outflows since platinum is under-owned as an investable asset.
#8 - Emergence of Physical ETFs - Platinum ETFs backed by physical holding of the asset are a relatively new (and growing) asset class. More ounces tied-up in custodian storage vaults means less supply of productive platinum for industry.
#9 - Auto & Emissions Markets - Global automobile production continues to grow, aided largely by increased car ownership in emerging markets. Increased focus on emission standards in these countries will lead to further industrial demand for platinum.
#10 - Gold Ratio - Although it is by some measure a subjective metric, the Platinum/Gold ratio remains below its historic lows despite a recent move back above parity. Any shift below parity (where platinum is cheaper than gold) offers an enhanced opportunity for investors to move into platinum.
Physical platinum ownership through an ETF does suffer from some of the same disadvantages as gold. It does not provide income, and in fact costs a management fee to hold. However, I believe that the potential for substantial capital appreciation while maintaining a low risk profile are key elements that make platinum a very attractive investment at today's prices.