Seeking Alpha

Outlook For Platinum In Second Half 2019

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Includes: GLD, PALL, PPLT
by: MarketGyrations
Summary

Platinum has fallen behind gold and palladium, both of which have increased in price while platinum has been going sideways.

The platinum market is confronted with a number of headwinds and tailwinds, all of which cloud the future prospects of platinum.

Platinum could be right for some people at these levels, but most should consider other options that are more likely to yield better returns near term.

Precious metals have received a lift recently, but that hasn’t been true for platinum (PPLT). If we compare platinum to gold (GLD) and palladium (PALL), we can see that platinum is lagging way behind. For example, a troy ounce of gold is now roughly equal to 1.7 ounces of platinum. Platinum was worth more than gold for a long time, but that's no longer true.

The situation has become even more extreme in the case of palladium. Here one ounce of palladium is currently worth about 1.9 ounces of platinum when a few years ago it would only get you 0.7 ounce. From the charts below, we can see that platinum used to be worth more relative to gold and palladium. However, both gold and palladium have surpassed platinum, which has fallen behind.

gold to platinum ratio palladium to platinum ratio

If we look at platinum from a historical perspective, we can see that platinum is currently near the bottom of a trading range between $800 and $1,000 where it has stayed for several years. If we go back further, the level between $750 and $800 is the area where platinum has previously bottomed in 2008/2009 and 2015/2016. It's possible that 2019 is the year that platinum is bottoming out before platinum goes on another rally.

Since platinum has had such a hard time falling below these levels, it may be a good idea to go long at these levels as there's significant upside at this point. In addition, with platinum trading at such huge discounts compared to gold and palladium, some investors may be tempted by what looks like low prices. But to determine whether such a move is warranted or not, we will have to look at where platinum is likely to go in the months ahead or whether or not it’s likely to stay where it’s at.

platinum chart

Platinum tailwinds in 2019

Charts are not the only factor in favor of platinum. As stated previously, gold and palladium have been going up in price. This fact alone should help platinum. The reason is because gold and palladium are both competitors of platinum in the jewelry and automotive market, respectively. The cheaper platinum becomes relative to gold and palladium, the more attractive platinum becomes as an alternative to other precious metals.

For instance, people shopping for jewelry often have a choice between gold and platinum. The more expensive gold becomes, the more likely it becomes that consumers will consider platinum jewelry. If gold and palladium prices keep increasing as they have, platinum demand should get a lift from increased jewelry and investment demand. The opposite is also true, lower prices for gold and palladium will put pressure on platinum.

Another example is in the automotive industry where palladium and platinum are used in autocatalysts to control harmful emissions. The former is preferred in vehicles with gasoline engines and the latter is preferred in diesel engines. Rising palladium prices could force manufacturers to consider substituting palladium with platinum wherever possible.

Another factor to keep an eye on is the possibility of worker strikes in South Africa, which produces most of the platinum in the world. South African unions have made their demands known to mining companies and have warned that they will go on a strike if they have to, similar to what happened in 2014. While nothing major has happened so far, the possibility that something will happen looms over the platinum industry.

The irony is that low platinum prices force mining companies into putting more pressure on their workers in order to cut costs. Therefore, the longer platinum prices stay low, the more likely it becomes that there will be worker unrest. If there are strikes and platinum production is reduced as a result, then prices should get a boost as there will be less supply to go around.

Platinum headwinds in 2019

Technicals may be in favor of platinum, but it’s a somewhat different picture in terms of fundamentals. Platinum is still suffering from the after effects of the diesel emissions scandal in Europe, which has negatively impacted demand for platinum. Platinum demand has been shrinking due to its biggest source of demand being weak, something that has been going on for a number of years.

However, there are signs that change may be on the way. According to data from Johnson Matthey, platinum demand is projected to increase in 2019. A reversal of prior years when demand decreased. While the supply side is expected to remain more or less stable, the demand side is more likely to be subject to positive change. Autocatalyst demand is forecast to increase after years of decline, but the biggest driver is expected to be investment demand.

Investment demand for platinum could rise sharply, especially if gold and palladium keep going up as they have. In fact, increased demand is projected to turn the supply and demand equation from a surplus, like we had in previous years, into a deficit. A big plus for platinum prices. The downside is that if investment demand does not materialize as projected, then the market will have to contend with another surplus. Something that's no good for platinum prices.

Platinum supply and demand (Unit: 1000 oz)

Supply

2017

2018

2019

South Africa

4450

4467

4565

Russia

720

687

668

Others

953

959

956

Total supply

6123

6113

6189

Demand

Autocatalyst

3248

3051

3128

Jewelry

2400

2269

2227

Industrial

2117

2459

2322

Investment

361

67

858

Total demand

8126

7846

8535

Recycling

-2047

-2105

-2219

Net demand

6079

5741

6316

Surplus/deficit

44

372

-127

Source: Johnson Matthey Market Report

Another factor to look out for is that global growth is slowing, which is not good for industrial metals. And even though platinum may not be thought of as an industrial metal, it’s one for all intents and purposes. A host of economic data, such as PMIs and so on, all point to weakening of the economy in many parts of the globe, including the U.S., Europe and China.

If this continues, or worse some big markets fall into a recession, then demand for platinum may not be as robust as expected. In other words, the demand outlook for platinum is uncertain and subject to risk factors that could require revisions to projected demand. The current forecast may be for demand to exceed supply, but that could easily change. It’s not at all certain that platinum demand will be as solid as some think.

Is platinum worth going long at this point?

The outlook for platinum is beset by several external factors that could swing the pendulum in either direction. If there is, for instance, a strike, platinum could easily go on a rally. But if the global economy falls off a cliff, platinum could fall along with it. If you ignore the projected increase in investment demand, the supply and demand picture for platinum doesn't look that great. So taking on a position in platinum carries a significant amount of risk.

The investment timeline is important. If someone is in it for the long haul and looking to buy and hold, then platinum is absolutely worth considering at this point. Platinum prices are currently near levels that have provided support for years. Assuming that support is not broken, platinum at these levels could be a good entry point.

Platinum is more of a challenge for those who don’t have all the time in the world as the uncertainty surrounding platinum makes it more likely that platinum will be going sideways in the short term. There's no way of knowing when platinum will break out of the range it has been stuck in. Just because platinum is at multi-year lows does not mean it cannot stay there for much longer. It may take years, which means that a platinum investor could be sitting on what's essentially dead money. If opportunity cost is important, then platinum may not be a good option.

The reality is that platinum is facing both upward and downward pressure from tailwinds and headwinds. As long as the balance between these two forces remains relatively intact, platinum is most likely to stay within the trading range between $800 and $1,000. If that’s the case, then platinum has limited upside compared to its rivals that have outperformed it such as gold.

Compared to platinum, gold has technicals that are as good, if not better, and fundamentals that are much stronger. Anyone that's considering platinum should ask themselves which is more likely to yield a better return if time is of the essence. If the answer to that question is not platinum, then it’s probably best to stay away from platinum when there are better opportunities to be found elsewhere.

Source: Wikimedia Commons

Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.