Forget Gold, It's Time to Think Platinum

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Includes: GLD, PGM
by: Aaron Katsman

When it comes to investing in precious metals, most investors tend to focus on gold and silver. With gold in the midst of a multi-year bull market, the yellow metal gets most of the media attention. Headlines like ‘Gold to Hit $2000 an Ounce’ and ‘Invest in Gold to Cash in on US Dollar Demise’ have appeared almost relentlessly over the past couple of years.

While gold has been the media darling, it’s actually one of the worst performing metals over the last year. Rising gold prices have been less about economic fundamentals, such as rising demand, and more about speculation. For most non-day trading investors, the last thing that you want to do is invest in a market driven by speculators. Before you know it, the speculators have moved on to some other asset, sending the value of your investment plunging, all while you are left holding the proverbial bag, without even knowing what happened.

There is no question that for investors looking for a hedge for inflation or US dollar exposure, gold is a reasonable investment. But is there a better alternative?

Best of Both Worlds

Wouldn’t it be great if you could invest in a metal that provides the same benefits of gold, like hedging inflation and currency exposure, but has an increasing industrial demand as well?

There may be an effective solution for investors looking to get the best of both worlds. Platinum is considered a ‘precious metal’ and also has recently seen surging industrial demand. “Both platinum and palladium offer investors a unique combination of leverage to the global economic recovery through the rebound in global auto output, as well as the supportive attributes of a precious metal,” analysts at Deutsche Bank wrote in a 2010 commodities outlook report.

With a struggling global economy the logical question is where this increased demand for platinum is coming from? The answer: the auto industry. While platinum has a number of industrial uses- it’s found in everything from jewelry to lab equipment to thermometers to electrodes – its primary use is in catalytic converters for the automotive industry. Catalytic converters allow complete combustion of unburned hydrocarbons from exhaust into carbon dioxide and water vapor, making it a critical component of any automobile. While it may seem foolish to base an investment decision on an industry where the well-known players appear to be on life support, one look at the numbers will make you rethink your apprehension. Regarding an uptick in the auto industry, the Deutsche Bank report said, “The outlook for the supply-and-demand equation over the next two years looks “increasingly favorable, with a sharp rebound in global vehicle production, auto-maker restocking and continued investment demand driving demand” for the two metals.

In fact, Chinese vehicle sales were up a staggering 49% in 2009. Even if that number were to drop in 2010, the increase in sales will still be a healthy jump from ’09 levels. It’s also important to note that just because some well-known auto manufacturers are in serious trouble doesn’t mean that the whole industry is going bankrupt. There are plenty of well-run automakers, and there is evidence that after 4 years of decline, new auto sales in the US have not only started to stabilize, but to slowly increase.

Michael Johnson of the ETF Database says: “Platinum is one of the world’s rarest metals, with annual global supplies totaling only about 6 million ounces, meaning that prices can be very volatile at times. Nearly half of the global platinum supply is used by auto manufacturers each year, establishing a strong relationship between metal prices and the health of the auto industry.” It is a basic question of supply and demand. With a limited global platinum supply and an apparent increase in demand, the potential exists for platinum to continue to surge.

Precious metal investing is not for everyone and can be very volatile. Speak with your financial professional to see whether an investment in platinum would be appropriate for your portfolio.

Disclosure: none