Gold isn’t the only thing that glitters.
We recently wrote about the gold/silver ratio – and how, based on silver’s price relative to gold prices, the price of silver looks likely to rise.
Silver isn’t the only metal that’s playing catch-up. Platinum is also trading at a historically low level relative to gold. In coming months the price of platinum is probably going to be a lot higher than where it is now.
Gold is the grand-daddy of the precious metals world. Almost every country on the planet has used gold as a currency at some point in its history. It is extremely durable and can be molded into all sorts of shapes to make fine jewelry.
But as popular and valuable as gold is, the price of gold has historically traded well below the price of “the rich man’s gold” – platinum.
Platinum is the third most-traded precious metal in the world, after gold and silver. One of the reasons for this is that platinum is a lot scarcer than either gold or silver, so there’s less of it to trade. Platinum is so rare that there’s even talk about getting more of it by mining asteroids.
Platinum is also a very useful metal. It is used to make jewelry, as the white metal looks a lot like silver and is more durable than gold. It’s also used to make LCD monitors, hard disk drives, batteries, dental equipment and electrodes.
But the most popular use for platinum is for vehicles’ catalytic converters, used to help reduce emissions. The auto industry is responsible for 40 percent of platinum consumption. Platinum is also used for fuel cells, which are a potential alternative to gasoline.
As shown below, the price of platinum fell 26 percent last year. It’s appreciated by 12 percent so far this year, but trails gold (up 19 percent) and silver (up 23 percent).
Platinum prices vs. gold prices
Platinum is almost always more expensive than gold. Over the past decade, platinum has on average cost 34 percent more per ounce than gold. At times, platinum has cost twice as much as gold.
But last year, the price of platinum fell well below the price of gold. As the chart below shows, platinum prices are at their lowest level relative to gold prices in the past 30 years.
Right now, an ounce of gold costs US$1,263. An ounce of platinum costs US$1,012. Platinum is trading at a 25 percent discount to gold – compared to a historical premium of 34 percent. Over the past 100 years, platinum has only been this cheap compared to gold a handful of times.
For the relationship between gold and platinum to revert to the mean, the price of gold has to fall, and/or the price of platinum has to rise. For a number of reasons that we’ve discussed recently, such as China’s gold buying spree, political uncertainty, and a potential new market for gold investment products, it’s unlikely that the price of gold is going to fall. It’s a lot more likely that platinum prices will be heading higher.
Is there too much or too little platinum?
To pin down a price for any commodity, you need to understand what’s happening with supply and demand. As Jim Rogers said, “Is there too much or too little?”
On the supply side, there isn’t very much platinum – that’s partly why it’s so expensive in the first place. Mining production of platinum rose 19 percent last year, to reach a five-year high of 6.08 million ounces (compared to gold mining production that was 17 times greater). Production is expected to fall 5 percent this year.
One of the reasons for the slowdown in production is a drop in supply from South Africa’s platinum mines, which are responsible for 70 percent of the global supply. (Russia and North America account for nearly all of the rest.)
The drop in production is expected to be offset by recycling of platinum by the automobile and jewelry industries. Unlike many other commodities – say, oil or wheat – platinum can be re-used. Overall, platinum supplies will remain flat this year.
But the demand for platinum is expected to increase. Johnson Mathey, a top manufacturer of catalytic converters and other emission control products, forecasts that platinum demand from the auto industry will increase by 2 percent over last year. They also expect other platinum-using industries to increase their demand by 10 percent this year.
Overall, they forecast an 861,000-ounce platinum shortfall this year – that’s 15 percent of the expected production. That’s up from last year’s 659,000-ounce deficit.
With too little platinum to meet the demand, and prices lower than gold prices – which hardly ever happens – platinum prices will likely head higher this year and next.
How to invest in platinum
It’s best to use an ETF, and one of the more popular platinum ETFs is the Physical Platinum Shares ETF. This ETF owns physical platinum bullion to track platinum prices. Its code on the Hong Kong Exchange is 3119, and on the New York Stock Exchange its ticker is PPLT.
The ETF has low trading volumes, though. So specify your buy (or sell) price, rather than allowing your broker to buy at the market.