By Nathan Slaughter
Back in November, I told readers of my Scarcity & Real Wealth newsletter about the aberrant relationship between gold and platinum prices. I thought the opportunity was so compelling that more people needed to know about it. So on Jan. 9, I shared it with StreetAuthority.com readers.
Historically, platinum almost always trades at a premium to gold -- as you would expect, considering it's about 30 times rarer.
With much thinner production and heavy demand, platinum has traded 28% higher than gold during the past five years and more than 60% above gold on average during the past decade. But earlier this year the two metals were at 1:1 parity, and platinum prices have since sunk below those of gold.
Right now, platinum at $1,498/oz. is actually trading at an 8% discount to gold at $1,643/oz. That's a far cry from the 25% premium where it started the year. The last time this relationship inversed, in 2008, gold went on to climb 38% during the next 16 months, while platinum soared more than 100%.
I think we could be headed down a similar path. According to Bloomberg, the median (not the most optimistic) forecast among 12 top metals analysts calls for platinum prices to reach $1,845 by the fourth quarter of 2012.
That could mean a gain of about 25% from today's levels.
I don't take analyst forecasts as gospel, but these experts do have an intimate understanding of what is impacting the market. And I agree 100% with their assessment of why platinum prices are set to climb -- the current inventory glut is disappearing fast.
On the demand side, car production continues to advance, particularly in emerging markets such as China.
According to research house LMC Automotive, car makers will manufacture nearly 80 million new vehicles next year, a new record. Just about all of those cars and trucks will be outfitted with a platinum- or palladium-based catalytic converter. This means demand from Toyota (NYSE: TM), General Motors (NYSE: GM) and others could climb 17% in 2012 to 3.82 million ounces.
That would eat up approximately $7 billion worth of platinum, the biggest auto consumption in five years. Bloomberg reports that four of the U.S.'s top six auto makers already topped production targets last month and are now running at the strongest pace in more than two years.
Meanwhile, industrial users are competing with investment demand, as holdings in physical platinum exchange-traded funds (ETFs) have recently risen 7% to 40.3 metric tons.
So will miners be able to meet the higher global demand? Nope. In fact, Barclay's expects supplies to drop around 1% in 2012.
Most of the low-hanging, high-grade fruit has been picked. Output is expected to dip in both Russia and South Africa (which combined account for almost 90% of the world's supply). To find new platinum, miners are now digging 1.4 miles down, where temperatures can hit 160 degrees.
That requires installation of costly refrigeration equipment -- at a time when wages and energy costs are already spiraling. Anglo American Platinum (OTC: AGPPY.PK), the world's top producer, recently announced that production costs will soon touch $1,567 an ounce.
Remember, the platinum spot price is near $1,500 per ounce. Few miners will be motivated to bring new platinum to market at $1,500 when it costs more than $1,500 to dig it up. Something's gotta give. And that's a big reason why there will be fewer ounces of platinum to go around during the next 12 months.
I think threats to the global economy have been overstated and industrial users will be hungry for more platinum in 2012, just when output begins to fall.
Platinum prices must rebound above the cost of production. In fact, they've already started: when I first updated my Scarcity & Real Wealth readers on this situation, platinum stood near $1,400 per ounce. So 2012 could be a banner year for producers. Anglo American is anticipating a 44% jump in profits for the year; Impala Platinum (OTC: IMPUY.PK) could see a healthy 28% increase.
Those are two of the top holdings of First Trust ISE Global Platinum (Nasdaq: PLTM), the ETF I mentioned last week, which is one of my Scarcity & Real Wealth portfolio holdings. The fund may not shoot out of the gate in 2012, but I believe it will finish strong, perhaps rebounding into the upper-$20s.
Disclosure: N. Slaughter does not hold positions in any securities mentioned in this article. StreetAuthority owns shares of PLTM in one or more if its “real money” portfolios.