Platinum: A Stronger Safe Haven than Gold?

By Julian Murdoch

Gold has scored a lot of press lately, and for good reason: Its price just keeps on making new records and breaking them. Just last week, the yellow metal recently struck a new all-time high of $1,072/oz.

But on a year-to-date basis, another precious metal has quietly outshone gold's returns: platinum.

As we've discussed before, platinum is both an industrial metal and an investment vehicle, used to make jewelry, construct automobile catalytic converters and as a safe haven for bullion investors. Last year, the white metal was still in hot demand: According to Platinum Today, in 2008, miners across the globe produced 185.7 metric tons of platinum, but consumers used 197.4 metric tons of the white metal—a deficit of 11.7 metric tons.

That deficit was a result of a supply-side shock. Power shortages in South Africa, where the majority of the world's platinum is mined, caused severe interruptions in mining operations. By early March of 2008, platinum had hit an all-time record of $2,301.50/oz., while gold hovered around $98/oz.

Of course, last October, both metals took a beating as a result of the financial crisis, and their prices had started to converge. Platinum was the harder hit, dropping 68 percent off its record to strike a five-year low of $744.25/oz. on Oct. 27, 2008. Gold fared slightly better, hitting its low of $705 a couple of weeks later.

Since then, both metals have managed to recover from their lows, as investors turn to precious metals for safe havens from the weakening dollar. But platinum in particular has taken off; since the beginning of the year, platinum's price has gained more than 50 percent, reaching a high of $1,367.90 last Tuesday:

But not all of platinum's outperformance can be traced back to safe-haven investing. As with most things in the commodity world, China has also influenced platinum's recovery.

Demand Recovers ... But Is It Enough?

In the first half of 2009, demand for platinum jewelry in China went up 81 percent year-over-year. That's a big deal: According to platinum company Lonmin, China accounts for over 60 percent of the world's total platinum jewelry demand.

Japan has also regained its appetite for platinum jewelry, with sales of new metal up 500 percent. Granted, that number is so large only because the starting point is so low; Japan recycles a lot of its old metal, so any increase in demand for new platinum inherently carries a big percentage increase.

What about demand from the automotive sector, which in 2008 accounted for 60 percent of all platinum usage? While it's still too early to argue that increased car production is actually supporting platinum, demand outside the U.S. has been slowly picking up. China, for example, sold 9.66 million new cars since the beginning of the year—1.33 million in September alone as a result of government incentives.

Still, even with these positive signs for demand, many analysts expect a surplus of platinum both for 2009 and 2010—although it doesn't seem to be affecting their price forecasts much. GFMS Ltd. expects a surplus in 2010 of over 11.3 metric tons, with prices in the $1,250 range. Lonmin disagrees, stating 2009 will only see a small surplus, with 2010 more balanced; they predict the market will swing back into deficit for 2011 and 2012.

For its part, Bank of America/Merrill Lynch Research takes the more conservative view, raising its price forecast from $1,250 to $1,350 for 2010 (perhaps the analysts figure increased investor demand will support prices into 2010).

Regardless of what analysts predict for the future, if you want to understand platinum right now—and where it could go next—you have to look at physical investments.

Physically Backed Platinum ETFs

Currently, the only ETF that holds physical platinum is ETF Securities' Physical Platinum (LON:PHPT), putting it in an ideal spot to take advantage of the investor rush to safe havens. During the first quarter of the year, investment inflows grew 82 percent from the previous quarter; as of Sept. 30, the fund held 360,790 troy ounces. During the past week alone, PHPT saw inflows of $29 million.

Rumors of a U.S. physical platinum ETF have been floating in the market for several years, but nothing has materialized—yet. As we reported back in April, ETF Securities filed with the SEC earlier this year to bring platinum and palladium ETFs to U.S. investors, but they've taken no public action on the paperwork since then.

The big question is: If a new ETF did open in the U.S., what effect could it have on demand and pricing, especially in a market as small as platinum's? Would it, as auto companies and industrial users suggest, siphon metals away from the market and therefore raise prices?

Let's run the numbers. Assuming GFMS is correct about the size of the platinum surplus we might see this year (11.3 metric tons), at today's platinum price of $1364.30/oz., a potential ETF would need to raise $4.96 billion to wipe the surplus out completely.

Considering that's just a bit bigger than PHPT is currently, it doesn't seem like much of a stretch to think a new U.S.-based ETF could easily become large enough to swallow up any excess platinum available in the market.

Of course, any new ETF wouldn't start off on day one that large. Besides, investors may be cautious about buying into the metal at the current price level, preferring to wait until a price drop comes.

But there is a distinct possibility that in such a small market, another ETF could become a force to be reckoned with.

Comments

[chap08:]

Platinum depends on the global economy getting stronger, gold doesn't. 60% of platinum usage goes to autos. Many countries have cash 4 clunkers type programs. When these wind down, platinum will be on its own. It may continue to benefit from a weak dollar but it will start to under-perform gold - severely.

Oct 19 08:14 AM

[daw_in_co:]

Platinum is subject to the laws of marginal costs for a finite resources. People talk about peak oil, well peak platinum was 2006. For S. Africa (80% of world production), take a look at % Merensky ore vs. UG2 and you'll find that Merensky is being depleted. This necessitates changing from a nickel based chemistry to chromium based. A number of furnace outages have resulted from this higher chromium content, so costs are higher. Wage settlements, 45% of costs, are running 10-11%, electricity costs went up 32% this year, and Eskom wants 45% next year. Outside S. Africa Norilsk Nickel just published 1st half production, Pt down 15%. Unlike gold, above ground stocks are estimated at 1/2 year's consumption. Pt looks solid to me.

Oct 19 08:34 AM

[fireball:]

i hold a small amount of platinum. the price to gold looks promising for now. as chap08 points out. tech may reduce its uses in the future.
history sides with gold and silver as recognized money for millenium.

Oct 19 08:40 AM

[sasoros:]

Take it from me, the South African power supply is still very marginal, and with the chrome smelters coming back on stream, outages in the early part of 2010 are a strong likelihood. Ingot demand from Japan reasonable too. The SA mines need a high rhodium price too, so you're probably best off investing in a shallow non-African producer.

Oct 19 09:00 AM

[yellowhoard:]

Catalytic converters are switching over to palladium from platinum, especially in places where there is growth like India and China.

I prefer palladium over the next several years for this reason.

Oct 19 09:52 AM

[Joseph L. S...:]

There are solid rational reasons to consider the PMGs (platinum metals group) over gold. And if the parket were a rational place, I might make that decision. But until a country song comes out with the lyrics, "All the platinum / in California / is in a bank in the middle of Beverly Hills / in somebody else's name" I'm going to stick with gold as my hedge position. It;s tried, it's true, it's emotionally, if not rationally, the more "logical" choice. And emotion rules the markets...

Oct 19 10:01 AM

[doubleguns:]

Electric vehicles will crush the platinum demand in the auto industry, but so far it has not. Investors are forward looking but this has not scared them. Will it later I don't know. I believe there simply is not enough precious metals (for investors) to keep prices down and all of them will flourish in the coming years.

I hold palladium, gold and silver. I think palladium has a better opportunity than platinum but only time will tell. I have not heard of ANY jewelery demand in palladium so who knows.

Oct 19 10:19 AM

[Slvrizgold:]

I like silver the best at under $20. I have to believe the fact that mine suppy PLUS scrap is below silver demand and usage. At some point soon, rational people will understand that an ounce of silver is more valuable and much more scarce than an Andrew Jackson. I believe that in the coming year nearly all physical silver will be sucked off the market and will not reappear and be sold until a much higher price, like a nominal new high $50+/oz. Don't get me wrong, I like all the precious metals, I had to snap up a few Pt Canadian Maples when price fell so dramatically. Palladium looks like a really strong underdog. As much as I like gold and I'd love to have thousands of ounces of it, I am convinced all the white metals will outperform.

Oct 19 05:23 PM

[optionsgirl:]

From Lynn Coins website:
" Industrial Uses of Platinum

– over 20% of manufactured goods depend on platinum!

Can you believe it? Over 20% of all manufactured items use platinum some time during the manufacturing process or in the final product. It is malleable, ductile, and has high technology uses due to its unique properties. For example, it is almost un-corrodible, has a extremely high melting point of about 3,215 degrees (Fahrenheit), has high electrical conductivity and has powerful catalytic properties. These things make it ideal for use in many industrial production processes.

You will find platinum used in the production of fiberglass, medicines, chemicals, computers, lasers, petroleum products (gasoline), fiber-optic cables, crude oil refining, fertilizers, synthetic fibers, glass, paints, wires, plating and explosives. Perhaps its greatest use in industry is to control pollution. It is widely used in automobile catalytic converters, which helps limit exhaust emissions. Platinum is necessary in the production of many of these items. Few ways have been found to substitute something else for platinum. Industries depend on platinum.

Although platinum is used in many production processes, it is also a part of many items. In addition to jewelry you will find platinum in things like chemotherapy medicines, industrial refrigerators, spark plugs, and catalytic converters. About a third of all platinum consumed each year goes to catalytic converters (for controlling dangerous exhaust emissions in cars) or pollution control devices used in factories. Pollution control will likely increase as countries pass environmental laws requiring cleaner air emissions and automobile catalytic converters.

Platinum has become an important industrial metal. Because it is such a critical material for many industries (and is rare) the US Government has labeled platinum a “strategic metal”."

Oct 19 08:51 PM

[doubleguns:]

Christ OG where DO you get this info. I never knew platinum was used in so many processes. Guess I will take my tail, tucked as it is, and go home for the night. :-)

Oct 19 09:07 PM

[Albertarocks:]

>But on a year-to-date basis, another precious metal has quietly outshone gold's returns: platinum.<

I'm not so sure the "year-to-date" data is what tells the real story. The relationship between gold and platinum has more been in lockstep for the last many decades (certainly direction-wise). But at the market peak of 2007 something changed drastically. Is it a permanent condition? I don't know. But wiser people than I can work out the possible reasons for it... I really care more about the fact that there was a disconnect and the charts I'll provide here may disclose some clues as to why. Anyone who's interested should be able to tap into these charts and ponder about what might have caused this. When you figure it out, let us know.

The first one is an overlay showing gold and platinum prices over the past 13 years (I only went back 13 years due to a limitation set by StockCharts for this particular format):
stockcharts.com/h-sc/u...

The chart below shows the same two metals, but shown on a percentage change format going all the way back to 1990. Keep in mind that the percentage changes are all related to the price at the earliest date on the chart (1990). In other words, on the starting date at the left of the chart, the percentage change for each metal was of course zero... and then the calculations begin:
stockcharts.com/h-sc/u...

And this last one below is a more "close-up" view of the chart above, zooming in so that it starts at the same time as the stock market peak of 2001 or so. Again, keep in mind that the percentage changes are all relative to the prices as they stood at the earliest date on the chart (in this case, 2001):
stockcharts.com/h-sc/u...

The most immediate conclusion I can draw from these pictures is that when the markets fell hard, platinum fell along with it. Gold on the other hand, fared much better and so far, the gap has not been closed. Anyone who can draw conclusions or insight from these, please leave your thoughts so I can sleep tonight.

Oct 19 09:43 PM

[Albertarocks:]

On Oct 19 05:23 PM Slvrizgold wrote:

> I like silver the best at under $20. I have to believe the fact
> that mine suppy PLUS scrap is below silver demand and usage. At
> some point soon, rational people will understand that an ounce of
> silver is more valuable and much more scarce than an Andrew Jackson.
> I believe that in the coming year nearly all physical silver will
> be sucked off the market and will not reappear and be sold until
> a much higher price, like a nominal new high $50+/oz. Don't get
> me wrong, I like all the precious metals, I had to snap up a few
> Pt Canadian Maples when price fell so dramatically. Palladium looks
> like a really strong underdog. As much as I like gold and I'd love
> to have thousands of ounces of it, I am convinced all the white metals
> will outperform.<

It's pretty hard to argue with that good old gold/silver ratio and right now it says silver will outperform gold until it gets back somewhere close to the historical level of about 15:1 or 20:1 (provided the precious metals are going to continue to soar). Today that ratio still sits at an unusually wide margin of 60:1. Silver is the more volatile of the two, so if gold takes off, silver will very likely take off at a greater rate. On the other hand, if gold falls, silver will fall at a greater rate (probably... but maybe not it the gold/silver ratio continues to tighten in spite of a potential overall drop in metals prices).

Oct 19 10:07 PM

[optionsgirl:]

Pure speculation with nothing to back it up:
Industrial companies fell hard and production was pared, therefore platinum fell, too?

Oct 19 10:12 PM

[Albertarocks:]

On Oct 19 10:12 PM optionsgirl wrote:

> Pure speculation with nothing to back it up:
> Industrial companies fell hard and production was pared, therefore
> platinum fell, too?

I'm thinking along those lines too. I think it's that when the market was falling, platinum's lustre as a precious metal quickly tarnished, and what remained was the reality that it's industrial uses were quickly diminishing as the economy slowed. But gold held up due to it's leadership as a true currency. I think that makes sense.

Oct 19 10:36 PM

[optionsgirl:]

www.mineweb.net/minewe...

Oct 20 01:41 AM

[Mark Anthony:]

Palladium is definitely way much more bullish than platinum. That's because over the years the global palladium market has relied on Russian government to sell one to two million ounces per year from the government's stategic palladium stockpile, to supplement supply on top of the world's annual palladium mine production. This stockpile was accumulated from the Soviet Era.

There has been many speculations that after nearly two decades of government palladium stockpile sale, that stockpile is now finally depleted. Two recent news confirms that the stockpile is indeed depleted:
www1.investorvillage.c...
and
www.bloomberg.com/apps...

Back in 2000/2001, when the general precious metal market was still a bear market, there was a rumor circulating that Russian government would temporary halt the palladium stockpile sale. It was a false rumor. But nevertheless even false rumor was able to push palladium price from $300 to $1100 in a few months.

Today, precious metals are in a bull market, the Russian palladium stockpile is now DEPLETED, not just halted temporarily. The conditions are set for a much more spectacular palladium rally than the 2000/2001 one.

Only three things available to play palladium:
1.The physical metal, and the ETF Securities palladium fund.
2. SWC stock.
3. PAL stock.

Read my articles on the research I have done on palladium:
seekingalpha.com/autho...

Oct 20 04:23 AM

[Doc 224899:]

I've been a great fan of yours for over a year, Mark Anthony, since you are a relentless researcher and tireless advocate for your opinions. I've only lost money on it so far, but I'm a fan anyway.

What will be the conditions and timing factors for the next good entry point for SWC or PAL?


On Oct 20 04:23 AM Mark Anthony wrote:

> Palladium is definitely way much more bullish than platinum. That's
> because over the years the global palladium market has relied on
> Russian government to sell one to two million ounces per year from
> the government's stategic palladium stockpile, to supplement supply
> on top of the world's annual palladium mine production. This stockpile
> was accumulated from the Soviet Era.
>
> There has been many speculations that after nearly two decades of
> government palladium stockpile sale, that stockpile is now finally
> depleted. Two recent news confirms that the stockpile is indeed depleted:
>
> www1.investorvillage.c...;mn=29392&amp;pt=m...
>
> and
> www.bloomberg.com/apps...;sid=ahjktr0QfTvE
>
>
> Back in 2000/2001, when the general precious metal market was still
> a bear market, there was a rumor circulating that Russian government
> would temporary halt the palladium stockpile sale. It was a false
> rumor. But nevertheless even false rumor was able to push palladium
> price from $300 to $1100 in a few months.
>
> Today, precious metals are in a bull market, the Russian palladium
> stockpile is now DEPLETED, not just halted temporarily. The conditions
> are set for a much more spectacular palladium rally than the 2000/2001
> one.
>
> Only three things available to play palladium:
> 1.The physical metal, and the ETF Securities palladium fund.
> 2. SWC stock.
> 3. PAL stock.
>
> Read my articles on the research I have done on palladium:
> seekingalpha.com/autho...

Oct 20 03:10 PM

[Mark Anthony:]

You could never time the market precisely. A good strategy is buy some first, and then buy more when you see a significant dip.

I have been forced to sell a lot of SWC on its way down. When SWC dropped to $2-ish I held back my position and I sold a lot of physical silver to raise cash to massively buy back my SWC positions. I have since been keep adding positions on every dip, using exponentially growing margin buying power.

My portfolio today is way much higher than where I was, at the beginning of 2008, even though the price of SWC is similar. Buying on margin gives you exponential growth power to recope your previous loss. But this is a risky strategy not suitable for every one. For most people I suggest they put part of the money in physical palladium metal, and part of the money to gain on leverage on stocks. The collapse of US dollar means most everything MUST go up. This is the best opportunity to seek extreme gains using extreme leverage.

If I have a billion dollars, I will buy up the whole company of SWC, and then use some cash corner the thinly trade palladium spot market to bump SWC share price by 20 fold. That's the most extreme of leverage. I don't know why some one has not thought about it. It's a matter of time.

On Oct 20 03:10 PM Doc 224899 wrote:

> I've been a great fan of yours for over a year, Mark Anthony, since
> you are a relentless researcher and tireless advocate for your opinions.
> I've only lost money on it so far, but I'm a fan anyway.
>
> What will be the conditions and timing factors for the next good
> entry point for SWC or PAL?

Oct 20 03:26 PM

[Mark Anthony:]

Mr. Alan Williamson's report in 2003 on Russian palladium stockpile estimate is a must read article for any one interested in learning the global palladium market supply/demand:

www.lbma.org.uk/docs/c...

Looking back, his bearish conclusion in 2003 was totally wrong:
www.kitco.com/LFgif/pd...

Oct 20 03:35 PM

[Plan B Econ...:]

Ignoring the dollar (i.e. just looking at supply and demand), there's a strong case that gold is overvalued.

www.planbeconomics.com.../

I think the dollar-depreciation is overpowering fundamentals right now.

Oct 20 07:38 PM

[Doc 224899:]

Devaluing of the dollar and market contraction may be the most overpowering of all fundamentals right now. I think they may explain why we are able to have a "jobless recovery" in the broad market, and why Wall Street is so disconnected from Main Street.

One more factor is probably in play, a factor that nobody has mentioned: foreign investors trading in the American exchanges. Many mornings gold will drop before the American market opens, having been pulled up during our night by trading in Asia, the Middle East, and Europe. Sometimes gold comes into our trading day 1.0% or 1.5% cheaper than it had been a few hours earlier on the other side of the world, then there's some trading and it rises back up and there's some more trading. Gold miners stock leverages the fluctuations in bullion prices. I think foreign investors are having our brokers execute their trades, and pulling 1% to 3% gains out of every day, which can add up to real money if it compounds every day. There's no reason they couldn't do that, and a profit incentive to do it.


On Oct 20 07:38 PM Plan B Economics wrote:

> Ignoring the dollar (i.e. just looking at supply and demand), there's
> a strong case that gold is overvalued.
>
> www.planbeconomics.com.../
>
> I think the dollar-depreciation is overpowering fundamentals right
> now.

Oct 21 05:07 AM