There are bulls and there are bears and, in the current climate, there seem to be far more of the latter than the former. They argue, quite convincingly, that the US economy is a house of cards and, through reckless fiscal policy based on Keynesian economics, America has borrowed, printed and spent itself to the brink of collapse. And despite the alarm bells, the current administration shows no signs of slowing down. The only real safe haven, according to this growing chorus of analysts, is investment in precious metals.
The remaining bulls point to the 2011 decline in both gold and silver as evidence that the opposite is true; that precious metals are in a bubble and the US economy is recovering – albeit slowly. The bearish counterpoint is, of course, to label the drop in spot prices as a correction or pull back. Ten year charts seem to support this notion.
If the bears are right (as they were on the housing crisis and its implications), the consequences are severe for both individuals and nations. More than ever, investment strategy today depends on, or is at least greatly influenced by, how one sees the trajectory of the economic system most directly affecting them.
Of course, world economies are intertwined and influence one another to a large extent. However, countries, sectors, companies and individuals vary in the degree to which they are isolated from the trends we are seeing in the West. That being said, with the US dollar being the international reserve currency (for now), everything continues to be measured against this standard. The US, by running the printing press night and day, also exports inflation to countries whose own currency is pegged to the US dollar. This is bullish for gold and silver as stores of value and well-recognized for their value as bullion.Click to enlarge
But what about the other precious metals? What about the platinum group metals and platinum, in particular?
What we have seen in the latter half of 2011 is a significant drop in the relative price of platinum such that it has been maintaining a spot price substantially below that of gold since August. Click to enlargeThis situation is certainly an historical anomaly and one which has been short-lived in the past. From 2000 – 2008 platinum price ranged from around 150-240% that of gold. In late December, it had fallen to just 88%; a clear relative undervaluation.
Fears of a Greek default, along with even larger scale problems in Italy, Spain, Portugal, and the European Union as a whole, led to a flight to the perceived safety of US treasuries. From one disastrous “currency” to another, individuals and institutions alike have moved. All the precious metals were down significantly but platinum the most sharply. Once the world looks past Europe and re-examines the US currency and sovereign debt crisis, precious metals will soar once again…including platinum. More importantly, economic decline in the West will be more than offset by growth in other regions; a factor that will bolster industrial demand for platinum, its primary driver.
As usual, the future can be predicted through good, old-fashioned demand and supply.
As noted, the primary use of PGMs is within industrial applications and particularly catalytic converters, with jewelery rounding out the majority of demand. Such a basis for demand strongly links platinum to prevailing economic sentiment, while its investment applications are in an inverse relationship.
Negative sentiment, arising out of Europe and the US, has overwhelmed any attention given to contrary indicators coming from other parts of the world experiencing healthy, if not dramatic, growth such as the obvious China and India.
According to JD Power & Associates, automobile sales in the US and Europe are projected to climb next year and, globally, are expected to grow at a healthy 8.5%. As a recent Click to enlarge Bloomberg article states, “Global car sales will rise 8.5 percent to 80.7 million in 2012, according to researcher JD Power & Associates. Demand is being led by developing nations, which will expand 6.1 percent next year, compared with 1.9 percent for advanced economies, the International Monetary Fund predicts.”
Of those new vehicles being produced in North America and Europe, increasingly stringent emissions standards will be drivers for platinum demand. Likewise, similar trends should be seen in the emerging markets where demand for larger, yet cleaner, vehicles with great catalytic requirements will continue to expand. As noted in an October 2011 article in Metal Miner, “Devoid of incentives, the trend in China this year has been for mid-size and larger vehicles.”
If you listen to Morgan Stanley, the projections are even rosier. In a December 2011 piece, Bloomberg cites a forecast from Morgan Stanley suggesting demand from auto catalysts will rise 17 percent to about 3.83 million ounces in the coming year.
An interesting take comes from Sasha Cekerevacof Wall Street Pit whoClick to enlarge observes, “The current marketplace has priced in very poor economic data; however, this will spur massive money supply growth coming forth by world central bankers in 2012. Money supply growth has been shown to lead car sales by three to six months, in addition to overall increases in precious metals prices. This is in addition to more interest rates cuts around the world; another key driver in car sales.”
Beyond the automobile market, there is significant demand for platinum and platinum group metals in fuel cells, LCD displays, pacemakers, cancer treatment drugs…the list, detailed on Johnson Matthey, is practically endless. In point of fact, demand for industrial uses other than autos rose 30% in 2010. Just as diversification of risk in a stock portfolio is desirable, diversity in demand is desirable in a commodity. Reductions in one area can be offset or shorn up increases in others.
In an FAQ discussing the requirements for fuel cell electric vehicle conversion, “The DOE analysis firm Tiax has conducted a detailed analysis of platinum demand to support a global FCEV deployment, and their data show that a 3%/year growth rate in platinum production should be enough. This is approximately the same growth rate that the platinum industry achieved in the 1960 to 2000 time period when catalytic converters were being deployed.” While a 3% increase does not sound particularly impressive, considering global constraints on supply, the increasing difficulty of mining and the fact that there are no existing stockpiles, this added demand could bode well for prices. And this is just one emerging source of new demand.
Like gold, platinum is highly-valued by jewelry consumers and manufacturers with rising demand coming from China. Per Austin Kiddle of Sharps Pixley, “Another factor is the rising demand in jewelery especially platinum in China, the biggest consumer of platinum jewelery at about 70% of world demand, which could be further stimulated by the cheaper platinum price versus gold.”
In terms of investment demand, in a January 2012 interview on MineWeb Radio’s Gold Weekly, Nick Brown states, “on the investment side you would have to think that more and more investors around the world will look at platinum as a means of diversification out of holdings of gold and perhaps silver as well. This should be an attractive entry point if you are long term bullish on precious metals.”
Johnson Matthey sums it up nicely:
- Automotive demand for platinum to be supported by heavy duty vehicle fleet renewals, recovery in Japanese vehicle output
- Growth in electronics and non-road emissions control demand sectors
- Jewelery demand to be maintained by strength of China market
According to Barclay’s, platinum mine supply will decline in 2012 for the first time since 2008. This reduction in output is attributed to increasing mining costs in both Russia and South Africa, which together account for approximately 88% of global supply. The low-hanging fruit in many high-producing regions has already been picked. Any further political or social instability in these areas could have serious implications for supply moving forward.
After an exhaustive executive summary, Scotia Mocatta concludes by stating, “We remain bullish for Platinum in the long term as we like the demand profile and feel the supply side will tighten.”
A survey of analysts conducted by Bloomberg shows the experts expect platinum to rise by 22% in 2012. Some forecasters are predicting a 2012 move to as high as $2120. Ross Norman of Sharps Pixley notes, “We see platinum and palladium as some of the strongest performing commodities for .”
How to Play
If one is considering platinum or PGMs as an investment, there are any number of opportunities to investigate before getting involved. Bullion and coins are available from major mints, including CanadaClick to enlarge
and the US, and platinum & palladium-based exchange traded funds have also emerged in recent years, with well-known strategists like Sprott looking to get in on the action by launching their own ETF. And Deutsche Bank launched the world’s first rhodium-based ETF on the London Exchange in June 2011.
Given the potential vulnerability of supply coming from South Africa, Russia and Zimbabwe, investors may also want to consider researching mining companies - producers and explorers - based in more stable jurisdictions like North America, as well. As was demonstrated, the demand for platinum is there and if the major producing countries are unable to keep up, other emerging sources will come to be relied upon. As always, any decision should be based on serious due diligence.
2012 will be an interesting and likely volatile year, which should see some clarity come to the economic situations facing both Europe and the United States – for better or for worse. While gold and silver both have industrial applications, their desirability as alternatives to fiat currency should support, and even increase, their price. Given its mostly industrial application, the market appears to be somewhat flummoxed with respect to platinum. Most experts seem to agree that it is poised for a significant comeback as we move forward, however. As discussed above, platinum is in a unique position among its peers in that, by virtue of its diversity, it may be able to simultaneously capitalize on economic decline and inflation in the West as well as continued expansion in the East. Looking back on platinum’s performance over the past five years, it may just have a future as construction material for roller coasters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I am a private investor, published author, boxing/mma columnist and currently hold the position of Investor Relations Manager with Prophecy Coal Corp. [TSX: PCY] and Prophecy Platinum Corp. [TSX.V: NKL]. Neither is mentioned here apart from my affiliation.