Platinum is on Fire, Will Gold Be Hot?

Includes: GLD, PALDF, SBGL
by: Thomas Tan, CFA

Platinum has been so hot lately, and has passed 2,100 (per oz) mark this morning. Palladium has also been rising in sympathy, now pushing the key $500 (per oz) level. Both platinum and palladium are 2 of the 6 metals in the so-called PGM (platinum group metals) area. Besides their usefulness in making jewelry, platinum and palladium have important roles in the auto industry, and they have been used as the oxidation catalyst in catalytic converters which treat automobile exhaust emissions.

Since PGM is also regarded as part of the precious metal group, it would be meaningful to compare their returns to those of gold and silver. In general, platinum is very much in sync with gold and silver from long term perspective. Gold has increased almost 4 fold from the 2001 bottom at $250, and silver has more than tripled from the 2003 bottom of $5, while platinum has risen from under $400 to over $2,100 currently.

It can be said that platinum has actually performed better than gold and silver (setting aside the less known rhodium which has performed unbelievably over 2000% for the last 7 years). On the palladium side, the story is very different. In 2001, palladium had actually reached  a $1,100 peak which has yet to be surpassed. Even today at around $500, it is still over 50% lower than the 2001 top. But I feel the 2001 number was probably due to hype at that time caused by the  change in emissions regulation,  which skyrocketed the demand of catalytic converters for the auto industry. With the subsequent downturn and troubles in the auto industry during the past several years, resulting in less demand, plus the possible stockpiling of excessive supplies of catalytic converters, palladium seems to  be having hard time to delivering  a return like platinum.

However, it is very likely that, with platinum soaring and making new all-time highs on nearly a daily basis, the commercial and investment wisdom of palladium substitution again looms. The catalyst for the current daily wild increase of platinum is probably due to the energy crisis and the power shortage in South Africa mines. As many studies show, the energy crisis in South Africa may well hamper platinum and palladium production for many, many months...if not years.

Approximately 35% of the world's palladium, and 70% of the platinum production come from South Africa. The two largest platinum producers in the World are both South Africa companies: the largest platinum producer: Anglo Platinum (JSE:AMS); 2nd largest: Impala Platinum (JSE:IMP; OTCPK:IMPUY). Impala is actually traded at the OTC pink sheet here in the US.

Now with the price differential between platinum and palladium so large in favor of palladium, companies such as North American Palladium (PAL) and Stillwater Mining (SWC) no doubt will certainly galvanize the attention of many Institutional Investors such as mutual funds and hedge funds. You have seen that PAL has reaped double digit return and SWC over 8%.

What is amazing is that today's return is built on top of an already spectacular rise going on during the last couple weeks. If you look at a PAL 8 year chart, it shows PAL share price rose to around $12 four times during last 4 years (2001, 2004, 2006 & last year). Of course, past performance doesn't guarantee that PAL will return to the same level, but if it does, even at today's $8 price it might represent a 50% share price appreciation, if both platinum and palladium can remain high in the future.

This is possible due to many factors, probably the most relevant one is the lingering of power shortage in South Africa mentioned above. This will impact platinum more than palladium since over 2/3 of platinum is from there vs. only 1/3 of palladium in the globe, but it will continue to motivate industrial consumer substitution toward palladium. The latest development in PGM is also bullish for gold and silver.

Now we see the whole precious metals category rising together from long term perspective, and they are in sync with each other and reinforcing each other. However, I am still more bullish on gold, since both platinum and palladium are more driven by industrial usage and fabrication demand, which might cap the potential future upside if we are looking at a very long term horizon, even their short term performance may be far better than gold. However, only gold commands the monetary function which is still yet to be fully revealed, unlike all the other precious metals.  What has happened to PGM might happen to gold, silver and many PM mining companies including juniors in the near future.