From strikes in South Africa to a volatile car market in China, investing in platinum is a huge risk. But there’s money to be made by those up for the challenge
Platinum is rare, and much in demand from both industry and investors, but you have to keep a close eye on the factors that affect its value. Unfortunately, there are a lot of these.
Almost anything could happen. A strike in South Africa; depressed car sales in China; changes in the value of the dollar.
Any one of these events, and there are lots more, could trigger a drop in the price of platinum. The number of potential factors is staggering. Nonetheless, a truly global investor – as, surely, we are all on the way to becoming – could make a fine profit on platinum investing, keeping an eye on all the necessary trends.
Look at the recent precious metal’s trajectory. After the sell-off in gold and platinum in 2008, both precious metals rebounded strongly from the October 2008 low by about 100 per cent, with platinum leading the way until early August 2011 when gold overtook the price of platinum.
Up until 26 October, platinum underperformed gold by about 17 per cent. Standard Bank analysts wonder if platinum might not be falling out of favour as the net speculative position in platinum, viewed as a percentage of open interest, has declined from about 38 per cent in January to about 20 per cent in October this year. Bullion broker Sharps Pixley insists this was clearly due to an increase in short positions – that sounds as though investors don’t like platinum as much, certainly. Another such suggestion is that ETF (exchange-traded fund) positions have also been flat this year compared with rising positions in the past few years.
Add to all this that platinum supply may rise in 2011 and 2012, as well as the uncertainty about the global economy. The fears provoked by the sovereign debt crisis in Europe hit platinum hard while having the opposite effect on gold. The price of platinum, of which about half goes to make automobile converters and about 20 per cent goes to make jewellery, is heavily dependent on consumer spending.
Around the world
China is the place where car sales are growing fast: As of the end of August, Chinese auto sales had reached nearly 12m units, a 3.3 per cent year-on-year increase, and production was also near 12m units, resulting in three per cent year-on-year growth, according to statistics from the China Association of Automobile Manufacturers.
So the price of platinum should find support in this. Not so fast: the car buyers in China want small, petrol powered vehicles, and these cars use less platinum in the catalytic converter, as a report from Platinum Investing News
The fears provoked by the sovereign debt crisis in Europe hit platinum hard while having the opposite effect on gold
Large-car sales, like those of SUVs in Europe, are far more important to platinum demand than those of small cars – some big cars even have two catalytic converters. The biggest platinum consumers of all are big diesel vehicles, and sales of these declined in China this year, the report says.
There is also the US Department of Defence (DoD) energy policy to consider. Last month, the DoD put out a report saying it would start powering its operations using fuel cells. Fuel cells consume a great deal of platinum, and the DoD consumes 80 per cent of the total energy used by the US government (that a lot of it goes off as hot air, we will not deny). As a result, the DoD is likely to buy a lot more fuel cells next year, which should mean a big rise in platinum demand.
As if that were not enough, there is South America for investors to worry about. A good bit of platinum demand is expected to come from emerging markets like Brazil, which are supposed to be translating their commodity riches into infrastructure improvements – meaning trucks are needed for construction and so on. While it is not clear how quickly this infrastructure improvement will take place, it could keep platinum demand lower than expected.
Supply and demand
So, let’s compound all our worries with the question of supply and production in the coming year.
On the supply side, some analysts express fears of shortages for the rest of the year. Platinum miners are digging deeper than ever to reach the reserves, according to Platinum Investor Daily. Research firm GFMS, which specialises in precious metals, estimates that companies are able to extract 3.83g of the metal from every tonne of rock. Production in South Africa is expected to decrease 8.4 per cent from its peak in 2006, and catalytic converter demand is projected, by bullish analysts, to increase by 64 per cent this year. Labour disturbances in South Africa, by far the world’s greatest producer, may cut supplies even further.
There’s more. Chemicals specialist Johnson Matthey points out that, in the past few years, platinum supply has not met demand, with 20-25 per cent of demand satisfied by recycling used platinum. Last year, for the first time, mining output and recycling fell short of demand. Indeed, for anyone planning to invest in platinum the development of recycling is yet another worry. The re-users of platinum are growing ever-more skilled at getting it out of waste and back into catalytic converters.
Got all that under control? Here’s the last one: the valuation of platinum versus gold. From 2000 to 2008, the price of platinum ranged between 1.5 and 2.4 times that of gold. Currently, platinum trades at about 93 per cent of the gold price, indicating some undervaluation. Obviously, there is no logical relationship between the two prices, it’s just that the coefficient had remained the same for a long time.
David Brown, the CEO of Impala Platinum, which mines the stuff, recently commented that the price for platinum could reach $2,000 by the end of 2012 as he sees a very positive order book for 2012 and describes “a disconnect between the financial world and real economy”. Certainly, it’s not easy to remain connected with all this data overload. But, if you have a flair for challenges, invest in platinum.