By Eric Dutram
Platinum is one of the rarest metals on earth, found in even smaller quantities than silver or gold. Though it receives less attention from investors than other precious metals, platinum is an interesting option because it is used widely in a number of industrial applications; most notably, this metal is a key component of automobiles. There are a number of different options for investing in platinum, including exchange-traded futures contracts, stocks of companies engaged in the extraction and sale of the metal, and both physically-backed and futures-based exchange-traded products.
Physical Properties and Uses of Platinum
Platinum is a dense, malleable transition metal, and as a member of the platinum group of elements it is generally unreactive. It is a relatively recent discovery - scientists first became aware of its existence in the 18th century - but certain physical characteristics have made it ideal for a wide variety of industrial applications. Platinum is resistant to corrosion even in extreme conditions, one of the characteristics that makes the metal appealing for use in catalytic converters.
About half of the supply of platinum goes toward emission control devices for automobiles; as a catalyst it allows for the combustion of unburned hydrocarbons from the exhaust into carbon dioxide and water vapor. Jewelry and electronics are other significant end uses, and platinum is also used in certain dental applications and thermometers.
Platinum Supply and Demand
Platinum is generally obtained as a byproduct of nickel and copper mining, and is among the rarest metals on earth. Annual production is only a fraction of the gold and silver mined, and represents a relatively small amount of physical metal.
South Africa is by far the world’s largest producer of platinum, accounting for about 75% of 2010 production and housing more than 95% of known reserves. The significant concentration of platinum in a single country has obvious ramifications for pricing, especially considering that South Africa is an emerging market that has experienced mine strikes and other disruptions historically.
|Country||2009 Production||2010 Production||Reserves|
In recent years, the relative scarcity of platinum group metals has sparked the development of technologies to recycle these materials. According to the U.S. Geological Survey, an estimated 26,000 kilograms of platinum group metals were recovered from new and old scrap in the U.S. in 2010.
Though platinum is a precious metal just like gold, these commodities do not always move in unison. Because there are various industrial applications for platinum this commodity tends to perform better during economic booms, sometimes eclipsing the price of gold by several hundred dollars per ounce.
- Health of Auto Industry: Because the automobile industry accounts for a significant portion of global platinum demand, price for this metal can be impacted by the health of this sector of the economy. Greater automobile production generally equates to stronger demand for platinum, while tough times for the industry can put a dent in prices.
- Technological Developments: As automobiles continue to evolve, the supply side of the platinum pricing equation has been put into question somewhat. A rise in electric cars might translate into reduced demand for catalytic converters, which in turn impacts the need for platinum adversely.
- Replacements: Some vehicle manufacturers are substituting palladium for platinum, as the former is cheaper to obtain. Historically, only platinum has been able to be used in diesel catalytic converters, but new technologies allow about 25% palladium to be used in the devices. Experiments have shown that percentage may go as high as 50% in the near future, further limiting platinum demand in the process.
Investing in Platinum
Platinum has appeal as an investable asset for several reasons. As a precious metal that is used widely in a number of industrial applications, it can be thought of from an investment perspective as a cross between gold and copper. Platinum has some safe haven and inflation hedge appeal as a precious metal, but also can benefit from strong demand for consumer products such as automobiles. It can also be thought of as a play on a continued boom in emerging markets, since greater auto ownership rates in the developing world would likely give prices a boost.
There are a variety of options for accessing platinum, including futures, ETFs and physical exposure:
Because platinum maintains an extremely high value-to-weight ratio (one ounce is worth well more than $1,000), it is possible and feasible for investors seeking exposure to simply buy platinum. This strategy has the benefit of eliminating the nuances of a futures-based strategy, but may require secure storage arrangements. There are a number of platinum coin dealers available online.
As discussed in more detail below, there are also ETFs whose underlying assets consist of platinum. These funds offer exposure to spot prices while allowing for economies of scale that can minimize storage expenses.
Platinum futures are traded on the New York Mercantile Exchange, with contracts priced in dollars and cents per troy ounce (one troy ounce is equivalent to about 31 grams, and is equal to about 1.1 avoirdupois ounces). Trading in platinum futures, which carry the product symbol “PL” occurs on the CME Globex, CME ClearPort and in Open Outcry trading in New York.
Platinum futures are available over 15 months, beginning with the current month and the next two calendar months before moving into the quarterly cycle of January, April, July and October. The contract size for platinum futures is 50 troy ounces.
Platinum futures are subject to NYMEX position limits.
Investors can also obtain exposure to platinum by purchasing stocks of companies that are engaged in extracting and selling the metal. Like most companies, the profitability of platinum miners depends on the prevailing market price for the products they sell. As such, mining companies tend to realize higher profits when natural resource prices are elevated - especially if significant portions of the cost structure are fixed in nature. Mining stocks tend to trade as a leveraged play on the underlying resource, meaning that the movements in price are often more significant than changes in the related commodity over the short term.
Many of the largest mining companies are engaged in the extraction of a variety of resources, including various precious and base metals. This is especially true for platinum since the metal is a byproduct of copper and nickel mining. There are, however, a handful of “pure play” platinum mining companies and firms whose primary focus is platinum:
- Aquarius Platinum Limited (OTC:AQPBF)
- Anglo Platinum Ltd. (OTCPK:AGPPY)
- Impala Platinum Holdings (OTCQX:IMPUY)
- Eastern Platinum (OTCPK:ELRFF)
There are multiple ETFs offering exposure to platinum as well, including both funds that invest in platinum futures contracts and funds that invest in physical platinum. While the returns generated by these funds will generally be similar - especially in the short term - over longer periods certain strategies may perform better depending on the slope of the futures curve. Platinum ETFs include:
- ETFS Physical Platinum Shares (NYSEARCA:PALL): This ETF invests in physical platinum, meaning that it will reflect changes in spot prices of the commodity.
- iPath Dow Jones-UBS Platinum ETN (NYSEARCA:PGM): As an exchange-traded note, PGM doesn’t have any holdings; it is a debt instrument whose return is linked to the performance of an index comprised of platinum futures contracts.
- E-TRACS Long Platinum ETN (NYSEARCA:PTM): Similar to PGM, this ETN is linked to an index comprised of platinum futures.
- E-TRACS Short Platinum ETN (NYSEARCA:PTD): This ETN offers a way to achieve inverse exposure to platinum prices.
There is also an ETF whose underlying holdings consist of stocks of mining companies engaged in platinum mining. The First Trust ISE Platinum Miners Index Fund (NASDAQ:PLTM) invests in about 25 different global mining stocks that have heavy exposure to platinum.