By Lara Crigger
Gold's rise might get all the ink, but so far this year, silver, platinum and palladium have also experienced sustained rallies, driven upward on the back of economic recovery and emerging market demand. As Julian Murdoch covered earlier this week, platinum's up 23 percent, palladium has risen 75 percent and silver recently struck its highest level in 30 years.
So how much longer can the greater precious metals rally last? For that, we turned to Philip Klapwijk, executive chairman of GFMS Ltd., an independent, U.K.-based precious metals research firm specializing in silver, platinum, palladium, and gold. Klapwijk is also editor of The Outlook for Gold Investment, and helps oversee production of the annual Gold Market Report, which sets the gold market's tone for the year to come.
Recently, HAI Editor Lara Crigger spoke with Klapwijk about his thoughts on the fundamentals of the so-called "white metals," including how sensitive they are to gold's price action, whether the highs can be sustained, and which matters more in the market: price manipulation, or the perception of price manipulation.
Crigger: Earlier this week, ETF Securities launched a precious metals basket ETF that includes gold, silver, platinum and palladium. Do you see benefits to diversifying your precious metals exposure in this one-stop-shop sort of way? Or is it better to hold the metals individually, so you can customize your exposure as needed?
Klapwijk: I'm sure ETF Securities wouldn't have launched a product like this without first making sure there was interest in a precious metals basket ETF. But on the other hand, I think there are investors who prefer a more bespoke-type investment, and are looking for ways to spread out their exposure.
One reason for that is that the drivers—although they're frequently common—are not identical for the four precious metals. And we've seen recently that you can get very different reactions to external phenomenon, or internal market-driven, factors. That may argue against treating these metals as fungible assets.
Crigger: Just how connected are these four precious metals, anyway?
Klapwijk: I think you need to look at the demand side for these metals, and there are some fairly large differences between the white metals and gold. Those differences stem from the fact that the white metals—platinum, palladium and silver—have more industrial uses, while gold's main use is in jewelry, which I would argue has a different set of drivers behind its demand.
The fabrication demand for the white metals is, generally speaking, a lot less price sensitive. Gold demand in the form of jewelry reacts relatively quickly to price stimuli. But if you think of autocatalysts at the other extreme, to re-engineer your autocatalysts is quite a massive task, and that means price sensitivity will be slow in the bulk of the platinum group metals.
For silver, perhaps it's even more so. If you look at the electronic demand for silver, the short-term price sensitivities there are virtually absent.
But if we look at safe-haven investment demand, the very large bulk of that is going to gold, which is traditionally viewed as that protection in times of trouble. Silver, to some extent, is riding on gold's coattails, and in the U.S. in particular, there is a tradition of investing in silver as a hard asset. But it's only the case to a very limited extent for platinum and palladium. We've seen that, for example, over the summer just past, where the sovereign debt crisis that we have in Europe stimulated significant purchases of gold for safe-haven purposes, and to a lesser extent, silver bullion—but we really didn't see any significant pickup in platinum or palladium bars and coins.
Crigger: So it's not that these metals are inherently magnets for safe-haven investors, but just that the interest from gold tends to spill over a little.
Klapwijk: Exactly. Perhaps people look at the fundamentals of those metals and draw their own conclusions; if gold's going to go for a ride, then we quite like the idea of platinum given the spread or given South African mine production or so on. And that might influence their choice for platinum as a metal to go into.
Because the platinum group metals—and this is true for silver, too—are relatively small markets, investment demand coming in at the margin tends to have a substantial impact on prices. That's what we've seen with platinum, palladium and silver in recent months.
Crigger: Platinum and palladium have similar applications—they're both used in catalytic converters—but in terms of supply and demand fundamentals, which of these two metals do you think has more upside left?
Klapwijk: Palladium, on a straight supply/demand analysis. I say that because if we look at the gross market deficits—and here we're looking at fabrication demand versus mine production supply and scrap recycling—you have, in palladium's case, a fairly substantial gross deficit this year. In other words, there's apparently insufficient supply to meet the size of demand. Obviously that's not entirely the case, because there are stockpile movements to satisfy this deficit, but at a very basic level, the palladium market is tight. If those stocks holders—like the Russian state—are not forthcoming, then this market is a bit like a coiled spring. Prices can and have moved much higher.
If we contrast that with platinum, the situation is much different. The platinum market is in a sizable gross surplus this year, and that gross surplus has come about because the demand side for platinum has not picked up nearly as well as that for palladium in 2010, compared to 2009's depressed levels. There has been some increase in platinum fabrication demand, but it's relatively minor.
Crigger: Why is that? Why haven't we seen a pickup in platinum?
Klapwijk: That's for several reasons. First, the autocatalyst demand for platinum is geared toward diesel vehicles, and those diesel vehicle sales are concentrated in Europe, the car market of which has been depressed this year, partly because of the underlying weak economic situation but also the scrappage schemes that have encouraged demand for new vehicles in the past.
The other reason is because of the actual absolute decline of platinum jewelry sales in 2010 compared to 2009. That's very much a China story, where prices in China for platinum jewelry have hit such levels.
Palladium is increasingly used in diesel applications. A certain amount of palladium can be applied in autocatalysts for diesel vehicles; the technology now permits up to about 30 percent use of palladium. So not only is platinum tied to the increase of gasoline-powered car sales, but palladium's winning a bit of market share from platinum within diesel prices.
Crigger: Let's talk about silver—we've seen crazy prices in that market lately. What's going on here?
Klapwijk: A number of things are happening. Part of it is that silver's benefited from the move in gold—that almost goes without saying. But I think it's also benefiting because some of the money that would've gone into gold is going into silver instead, as kind of a leveraged alternative, from speculators banking on the fact that silver is likely to outperform gold on any major move higher. That type of thinking is also encouraged by the fact that even though silver's at 30-year highs, it's still well below its all-time highs of $50 per ounce in 1980. On the other hand, we kissed goodbye to $850 gold a long time ago.
Another factor at work here is the very good rebound in industrial demand we've seen for silver this year. It's been quite impressive from 2009. We don't think the market will get back to 2008 levels, but the strength of the demand has been surprisingly vigorous.
Another factor that's perhaps worth mentioning—although I don't think it plays with all investors—is the noise coming out of the CFTC investigation into alleged silver futures market manipulation. I think there are some people who believe this, and believe that the alleged shorts will be forced to cover, and the price will go to the moon. I happen not to agree with that, because I don't think there is any manipulation of the silver market going on. If so, these shorts really would've taken it on the chin, given how prices have more than doubled since the low in 2008.
I don't believe there's manipulation, but some people do, and that might encourage a little more buy-side interest from those who believe prices will be unleashed once the manipulation is forced to end.
Crigger: Whether there is manipulation in the market or not, can the perception of it create a lasting impact in the silver market?
Klapwijk: I think, to some extent, yes. There's been a racheting-up process with silver over the past several years, with higher floors and higher highs. I think you look at the price today, and people may say there's still plenty of scope for a fairly serious correction, even prior to the end of the year; but that correction may see silver still trading above $20/oz after all the dust has settled.
That's pretty exciting, if you compare to where silver has come from. There has been a sort of re-rating of sorts in silver, and perhaps part of that has got to do with the fact that a lot of silver demand isn't terribly price sensitive. You don't have a price-sensitive scrap supply - you don't get this wave of scrap supply entering the market if prices move to interesting levels.
Crigger: Right, you don't really see a lot of Cash For Silver operations advertised on late-night TV.
Klapwijk: Right, and I think maybe you would at $50/oz. Certainly not at $23-24 an ounce.
The other factor here which I think we have to mention is that this is a relatively small market. You basically have a market size of about 900 million ounces for silver's total demand per annum. And if you multiply that by even $20 per ounce, that's about $1.8 billion. So that's a relatively small market in the overall scheme of things. So more money coming into that market can have a big swing on prices.
Crigger: You've said that silver will remain in surplus for the remainder of 2010. Will it stay in surplus into 2011?
Klapwijk: It will. Silver's been in surplus since the beginning of the bull market, and the same is true about gold. But when it comes to surplus, what this tends to tell you is that these are markets which investors are buying into, and those investors will drive prices higher. It's not quite the same in the PGMs, where surplus tends to mean a bit more and has a certain weight on the market.
Disclosure: No positions