We are seeing some healthy profit taking in gold (GLD) and silver (SLV) after they made an explosive breakout over the summer. Investment demand after QE3 is increasing as investors seek alternatives to fiat currencies which are being devalued by Central Banks all over the world through quantitative easing.
We are seeing risk aversion in the precious metals space and volatility in the markets until probably after the U.S. Presidential Election. All over the world governments are looking to boost unhealthy economies.
Major infrastructure projects will probably be announced after the election both in the U.S. and China to boost employment. Additional means to boost the velocity of money and encourage risk on investments will be promoted by punishing hoarders of cash and treasuries.
In addition, we have serious supply concerns as the majors delay large mines and South Africa, one of the largest producers of gold, platinum (PTM) and palladium (PALL) (PPLT) is facing the worst and most violent labor crisis in decades. This situation will not end quickly and may continue to plague the South African mining industry. This will not only put pressure on the supply of gold, but could cause platinum to spike. More than 80% of the world's supply originates from this questionable jurisdiction.
A recent Marketwatch interview where I was quoted stated:
"…Jeb Handwerger, a natural-resource analyst and editor of GoldStockTrades.com, said that reduced supply from South Africa, combined with rising investment demand from emerging markets, could spur platinum prices to outpace gold.
"Platinum is still 20% below pre-credit-crisis highs, while gold and silver are approximately 80% higher," he said. "This deviation from historical means will not last forever … meanwhile, gold output in South Africa is a worry too. As of mid-October, strikes among Africa's largest gold producers have cut the nation's gold production by half, according to Bloomberg."
Read the full article on CBS Marketwatch by clicking here.
We stated for many years that investing in South Africa may be a risky proposal and it was no longer a mining friendly jurisdiction. Over the summer, we believed the tumultuous situation in South Africa with violence would escalate and platinum/palladium prices would break out. Since the strike gold jumped from $1600 to $1800 and platinum jumped from around $1400 to $1700. Now it has pulled back to strong support, making a 50% retracement.
In August, the Marikana Miners in South Africa walked off the job to protest low wages and poor working conditions. Over 36 strikers were killed. This was the most violent clash with police since the early 60s.
The strikes have spread all across South Africa. Many major gold and platinum companies were already dealing with lower production and higher costs. This turmoil is already putting more pressure on the supply side of platinum and increasing demands coming from the growth of the auto industry in emerging nations could cause a possible spike in prices.
Platinum producers such as Lonmin which owns Marikana have had to deal with low platinum prices and rising labor costs as platinum is $100 below the price of gold. Before the credit crisis platinum was more than double the price of gold. Since that time, the South African strikes are continuing to be a major thorn in the side of the South African miners such as Anglogold Ashanti (AU), Gold Fields (GFI), Harmony (HMY), Impala (IMPUY) and many more.
The workers have refused pay raises and it does not appear that the strikes will be ending anytime soon. Do not forget that working conditions in South Africa are much more challenging than other regions as miners descend to much greater depths underground where ventilation is a major concern.
Remember in 2007, over 3,000 workers were trapped underground. This led to some mines being shut down including one of the nation's largest gold mines. South Africa used to represent over one third of gold production in the early nineties, now it has dropped significantly as they probably produce close to a tenth of gold supply.
This implies that new discoveries around the world will need to make up for this decline. In addition to supply pressure on gold, South Africa is the third largest exporter of coal. Nevertheless, the main concern right now is platinum. Remember South Africa supplies about 80% of platinum to the world.
Platinum supply is only a tenth of gold and a hundredth of silver. Platinum is not only a monetary metal, but it has a strong connection to the automobile and jewelry industry which is showing increased demand especially from emerging nations such as China.
For instance, General Motors (GM) sold more cars and trucks in China (FXI) this past year than in the United States for the first time ever in its 100+ year history. This signifies the fundamental shift in demand coming from the rising middle class in China. This rise in consumption will need increasing supplies of platinum and palladium which is used in the catalytic converters to reduce noxious air emissions.
The reduced supply from South Africa combined with increased investment demand for platinum coming from the emerging economies could spur the platinum price to far outpace gold.
It's time to pay attention to platinum as it begins to receive more notice from the mainstream media. Platinum is still twenty percent below pre credit crisis highs while gold and silver are approximately 80% higher. This extreme deviation between platinum and gold from historical means will not last forever.
Gold and silver have gained attention as a store of wealth, while platinum has been significantly overlooked and undervalued. The public is still viewing platinum as an industrial metal disregarding the fact that platinum has a history of being used as a store of value for over 300 years. Platinum is 30 times rarer than gold, yet currently it is trading more than a $100 cheaper than gold.
During good economic times platinum has been usually double the price of gold. Before the credit crisis, platinum reached a high of $2252 when gold was below $1000 an ounce. Despite current pricing, demand especially from emerging nations has far outstripped supply for many years. South Africa, which controls more than 80% of world platinum supply, is in danger. Platinum, the rarest precious metal, may soar, outpacing gold.
We believe very strongly in diversifying across the metals universe to reduce volatility. Portfolios should include not just gold, but silver, platinum, uranium, rare earths, copper and other critical metals needed for emerging, modern industrial nations. We may see gut wrenching inflation due to historic monetary accommodations by Central Banks.
In such an environment where we transition from deflation to inflation, platinum may outperform. This may be the beginning of the outperformance of platinum over gold. Platinum's inflation adjusted high is around $3000. It is trading now below $1650.
Given the global currency debasement, platinum could double from these levels to just keep pace with gold and silver. The reason platinum is not the flavor of the day is that it is not yet as liquid as gold and silver.
In conclusion, major hedge funds and large banks have not participated yet in this rarest precious and monetary metal. Once they enter the arena watch out for an explosive move.
Now it is time to look for advanced platinum mining projects in stable jurisdictions. The implications of the South African supply and labor crisis will accelerate investments in politically stable platinum mining projects.