According to the World Gold Council, in 2010, the total yearly supply of gold was 3,766 tons, comprised of mining supply (2,209 t), net official sector sales (234 t) and recycled gold (1,323 t). This year, the net official sales element will be zero. Gold jewelry demand was 2,151 t., and until the price pushed up over $1,550 was sharply up from that, in 2011.
According to Johnson-Matthey's "Platinum 2011" report, total yearly mining supply of platinum was 6.06 million ounces (188.49 t) plus 1.84 million troy ounces (57.23 t) of recyling from old catalytic converters and the like, for a total supply of 245.46 metric tons. These calculations are based upon metric tons, as opposed to U..K long tons, or American short tons. It is unclear whether or not the World Gold Council is using the metric ton or some other definition of a ton. Adjusting to another tonnage definition would change the outcome slightly, but not materially.
As the price of gold and platinum have come closer together, we have seen an 80% increase in platinum jewelry demand in China, and a 40% increase in the USA and U.K. Let us assume that 5% of gold jewelry demand shifts from gold to platinum. Five percent of 2,151 tons is 107.55 tons. According to Johnson Matthey, total catalytic converter based platinum demand was 3,125,000 troy ounces (97.2 t) in 2010. In other words, a mere 5% shift in jewelry demand from gold to platinum more than offsets the complete and utter demise of the auto industry all over the world.
Let us assume that we enter a severe recession or depression. Gold jewelry demand decreases by 25%. Auto production declines by 25%. Meanwhile, as is usual in times of economic instability, whether inflation or deflation takes hold, gold prices tend to rise. We will ignore, for the moment, the ongoing shift from gasoline to diesel cars and the new regulatory requirement that off-road diesel vehicles be fitted with catalytic converters heavily loaded with platinum. Both changes will mean a net increase in platinum metal with an equal number of units sold. However, they also increase the complexity of our calculations, so, instead, we'll use an ultra-conservative scenario that is most hostile to our proposition.
Let's just say that demand for auto catalyst platinum decreases by an equal 25%. The 5% shift in jewelry demand, from our hypothetical, after the absolute decrease in gold demand, will cause an increase in platinum demand of 80.66 tons. The offsetting decrease in auto production will cause a decrease in platinum demand of 24.3 tons. Thus, the platinum market will experience a net increase in demand of 56.36 tons. It is hard to see how this deficiency can be made up, given that the yearly mining supply of platinum is a mere 6.06 million troy ounces, and has actually DECREASED over the last 5 years by about 850,000 ounces, in spite of rising platinum prices.
As gold prices rise, jewelry substitution demand will become stronger and stronger. Investors, watching the price of platinum rising with the price of gold, will tend to hop on board the train after their fear of platinum's status as an industrial precious metal is overcome. That will especially be the case if we experience heavy inflation in tandem with large price hikes in other commodities as we have seen, to a limited extent, in 2011. Logic and reason tell us that the price of platinum is eventually going to return to its pre-crisis level of 2-2.5 to 1 to the yellow metal with or without an increase in vehicle production. It may go beyond that level if the economic environment is bad enough and investment interest is sufficiently sparked by platinum's price correlation with gold.
No investment analysis would be complete, however, without looking at the other side. What if the ill-conceived efforts of the Federal Reserve, Bank of England, Bank of Japan, and ECB actually work? What if the money printing orgy sparks the world economy back into growth-mode? As unlikely as that may be, it would mean that emerging markets would continue to grow as before with a great increase in auto and truck demand, oil would continue to rise in price, leading to a continuation of the ongoing shift from gasoline fueled engines to diesel (requiring 8 times as much platinum) and overall jewelry demand for all precious metals would rise. Gold, silver and platinum would all return to steadily rising prices, via the pre-2008 paradigm, but would be starting from a permanent plateau created by the augmentation of the worldwide monetary base.
Chinese platinum jewelry demand is, by far, the biggest in the world. It currently equals 51.01 metric tons, with the rest of the world accounting for another 23.33 tons. As discretionary income in China grows, even if the relative desirability of platinum versus gold doesn't change, platinum jewelry demand will grow. But, with platinum for gold substitution just beginning, we have already seen platinum jewelry demand in China rise by 80% in the first quarter of 2011 and by 40% in the USA and U.K. Assuming the pace is maintained throughout 2011, it will mean 91.18 tons sold in China, or a net increase of 40.81 tons.
If we assume that the rest of the world is in line with the increase in USA/U.K. demand, with less than a $200 per troy ounce difference between the two metals, we can expect a total of 41.99 tons of platinum jewelry to be sold in non-China markets in 2011, resulting in a net increase in demand of 18.66 tons. But platinum jewelry demand in other emerging markets, such as India, though still far lower per capita than China, is growing at a much faster rate. Prior to Q1 2011 and the vast increase in gold prices, China's platinum jewelry demand was standing still. But during that period, during which high prices were temporarily discouraging Chinese buyers, India's platinum jewelry demand was already exploding with consumption of platinum increasing at a rate of almost 50% in 2010.
As noted from the data we have regarding India, the overall rate for non-China areas of the world may well equal or exceed China's + 80% Q1 2011 consumption increase. Remember, the USA and U.K. are the epicenters of the world financial crisis, and, even there, platinum jewelry sales increased at about a 40% pace. But marketing-savvy people know that, right now, only the group known as "first adopters" are substituting already. Platinum substitution for gold sales will increase both as the price of gold rises and as it becomes more and more of an established practice of young brides and others.
As was discussed in a prior article, it is likely that the dramatic increase in platinum jewelry demand occuring in China and elsewhere right now may already be causing very tight market conditions for the purchase of physical platinum. Any way you look at things, all precious metals are going to do very well over the next decade. In all likelihood, platinum will return to its previous 2-2.5 to 1 relationship with gold, so in the long run, it is likely to rise much faster than gold. In light of the unsustainable debt load of both Europe and America, world economic instability is likely to spur gold sales and continued price increases for the yellow metal. That will also drive up platinum prices. Anyone thinking about investing in gold should consider platinum because, contrary to popular belief, as illustrated above, even a total collapse of industrial use will not quench a price rise.
Both JP Morgan Chase (NYSE:JPM) and Deutsche Bank (NYSE:DB) have taken delivery of a huge amount of physical platinum bars at NYMEX this year. This month, JP Morgan took delivery of over 100 bars of additional platinum for its "house" account, while its "customers" sold over 200. At the same time, the Merrill Lynch division of Bank of America (NYSE:BAC) joined its primary dealer brethren and took physical delivery of 114 (and counting) 50 ounce NYMEX approved bars for its "house" account. That is what is happening in the visible markets. A much larger number of physical bars may be moving into big-bank "house" accounts from both the "spot" OTC market and through the maturity of London-based OTC derivatives. For more information on how to invest in platinum, see these other Seeking Alpha articles: here, here, here and here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.