Have Gold Bugs Eaten Platinum’s Premium?

January 09, 2012

It’s true platinum’s cheaper than gold, but how long will the world of precious metals be upside down?

 

It’s no secret that anxious investors have been pushing up gold prices for more than a decade, but many did a double-take last fall when the yellow metal’s price overtook that of platinum.

Both metals crashed following the collapse of Lehman Brothers in 2008, as hedge funds liquidated gold holdings to raise cash and investors braced for a deep recession that flattened the automobile industry, one of the biggest consumers of platinum. Gold has since bounced back in a big way, reaching almost $1,900 after S&P’s downgrade of U.S. debt last summer. But platinum has yet to regain its footing.

Last year was supposed to be a banner one for platinum, as global demand was boosted by rising automobile production from companies such as General Motors. But Japan’s earthquake last March resulted in Japanese demand for platinum dropping to its lowest level in almost three decades, according to a Bloomberg News report. In addition, a modest increase in the amount of platinum mined created a small surplus, which also helped depress prices.

All the while, gold kept moving higher because of unrest in the Middle East, uncertainty in Europe and the unsettling aftermath of S&P’s downgrade of U.S. debt. Finally, on Sept. 2, Comex gold futures settled at $1,875.25 per troy ounce, just above platinum’s closing price of $1,873 per ounce. Considering the price history of the two precious metals—platinum has traded at a $200 to $400 premium to gold—the reversal was stunning.

Before the 2008 crash, platinum, the much scarcer of the two metals, was trading at more than $2,270 per ounce. That stratospheric price was due largely to production concerns in South Africa and the implications of tightening platinum supplies for the car industry, which uses the metal for exhaust systems. At that time, gold was valued under $990 an ounce.

So what has become of platinum’s premium to gold, and will it ever return? The first thing to understand is that although both platinum and gold are precious metals, they are akin to opposite sides of the same coin.

“Not all precious metals do the same things,” said Tim Harvey, a senior vice president of ETF Securities. “Gold is very much looked upon as a financial instrument—it is very much a store of value,” whereas platinum and palladium are “industrial metals with precious metal qualities.”

Bullish On Platinum, But When?

Johnson Matthey, the specialty chemicals company, forecast in a report released on Nov. 15 that gross demand for platinum would climb by 2 percent in 2011, reaching its highest level since before the 2008 economic crisis.

That should have meant higher prices, but instead the metal plummeted to its lowest level on record relative to the price of gold, according to a December report by ETF Securities, the London- and New York-based fund company behind the only U.S.-listed physical platinum ETF, the ETFS Physical Platinum Shares (NYSEArca: PPLT).

So far in 2012, platinum is still lagging. On Jan. 5, platinum was trading at $1,404 per ounce, whereas gold was at $1,600 per ounce and showing incipient signs of a 12th-straight year of increase.

In the past year, PPLT has fallen about 18 percent, while SPDR Gold Shares (NYSEArca: GLD), the physical bullion ETF, is up by 17 percent.

Platinum is one of a family of six metals referred to collectively as the platinum group metals (PGMs) that are virtually irreplaceable in certain industrial and electronic applications. Auto-catalysts accounts for about a third of world platinum demand, and platinum is also heavily used in the electronics industry in the manufacturing of televisions and computer hard drives.

One important factor that could push platinum prices up is that 80 percent of it is mined in South Africa, a country known for a workforce that’s quick to strike as well as its spotty electricity supply—both of which increase mining costs.

 

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