Platinum Is Worth Acquiring When Cheaper Than Gold

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Includes: PGM, PPLT, PTM
by: MarketGyrations

Summary

Platinum is cheaper than gold, which is the opposite of what's usually the case.

The supply side of platinum is bad and will get worse if prices do not improve.

Demand for platinum can only increase while substitutes become less attractive.

Platinum is one of the best known precious metals. While not as popular as gold and silver, there are some people out there who consider platinum to be an alternative candidate to those two metals. In fact, there are several reasons to consider as to why platinum is worth acquiring at this point in time, either in bullion form or in the form of ETFs such as PPLT (NYSEARCA:PPLT).

1. Platinum is currently cheaper than gold

On January 15, the price of platinum did something that doesn't happen all that often. On this day, the price of one troy ounce of platinum was lower than that of an equivalent amount of gold. You would have to go back all the way to early 2013 for the previous time that platinum was cheaper than gold. This can be seen by tracking the platinum-to-gold ratio.

The platinum-to-gold ratio expresses the relationship between the price of platinum and gold. When the two are priced evenly, the ratio is one. When platinum is cheaper than gold, the ratio drops below one. When platinum is more expensive than gold, the ratio rises above one.

Platinum and gold

Historically, the platinum-to-gold ratio tends to stay above one most of the time, which implies that platinum sells at a higher price than gold. Since platinum is usually more expensive than gold, it makes sense to acquire platinum when the reverse is true and it's cheaper than gold.

As for the reason why platinum is usually priced higher than gold, it's because platinum is more difficult to produce in comparison to gold. That raises the cost of production, which in turn requires a higher selling price to recoup costs incurred. High production costs also brings us to the next reason as to why platinum is a buy.

2. The current price is too low for many platinum producers, which hurts supply

At a price of around $1300, almost half of all platinum mines in South Africa are either at break-even point or suffering a loss. This is important because South Africa supplies about 75 percent of all platinum. The low price has caused major problems resulting in a supply deficit when it comes to platinum.

For instance, demands for higher wages cannot be met when mines are already losing money. This leads to more strikes, which in turn hurts production and causes even bigger losses. Such a situation is clearly not sustainable in the long run.

If prices for platinum stay low or drop even further, mines will sooner or later have to stop producing. This will reduce supplies even more, resulting in an even bigger supply deficit than is already the case. It will take some time as mines can produce at a loss up to a certain point, but it's unavoidable. Source

Supply and demand

3. The low price of platinum makes it more attractive compared to the competition

Although platinum is a precious metal, its number one application is as an industrial metal. Platinum is used in the catalytic converter (autocatalyst) of vehicles to reduce pollution from emissions. The primary competitor of platinum as a substitute is palladium.

While the price of platinum has fallen, palladium has rallied. As long as this continues, platinum becomes more attractive in the eyes of manufacturers that have to consider whether to use platinum or palladium. Demand for platinum should go up in this situation.

For a number of years, palladium has managed to gain market share in the autocatalyst industry at the expense of platinum. In fact, palladium now has the greater share, which is a reversal of how it used to be in the past. The more expensive palladium becomes, the more likely it becomes that platinum will regain market share.

Palladium is rising

Platinum is falling

4. Car production is increasing, which should help platinum demand

Furthermore, the number of vehicles that require a catalytic converter is set to rise. For instance, in China, the number one market, sales of vehicles is expected to rise from 23.5 million in 2014 to 25.1 million units in 2015. Worldwide, 74 million cars are expected to be produced in 2015, an increase of 3 million units over the previous year.

On top of this, new cars that are being built have to meet increasingly stringent emission standards that are being rolled out around the world to help control pollution and to preserve the environment. For instance, China has a major problem with pollution, which necessitates the need for platinum. Combined with the fact that China is the biggest car market and the implications for platinum can be considered to be bullish.

Conclusion

Platinum is not for everyone. There are many who don't find precious metals appealing for various reasons. For instance, they don't pay a dividend like many stocks do. The commodity sector as a whole has also been beaten down and people may not want to catch a falling knife.

On the other hand, if you're already into precious metals, you may want to consider platinum as a viable replacement for other precious metals. Even though the price of platinum may go down in the near term, moving into platinum could pay off further down the road. The supply and demand situation look very favorable.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.