Platinum Overview: Did We Miss Something?

Already two things have happened this year to make platinum a headline grabber; the narrowing of the platinum-gold spread and, of course, the $1 trillion dollar platinum coin.

We always thought (and still do) that it will ultimately be gold and silver which will come to the rescue of economies in the next few years. We also always thought (and still do) that gold is the safe-haven investment for times such as these.

However, the media, not known for their pro-gold stance, have decided that platinum deserves a wee bit more attention. For many it is the industrial precious metal, known as ‘little-silver’ which will solve the crisis and it is also this same metal which is possibly a better investment bet than gold.

Can this be the case?

First let’s deal with the coin issue. Earlier this month rumours that the US government were planning on minting a $1 trillion dollar coin to use to pay down their debt, circulated all over the media. Luckily, this idea has been shelved. The truth is, creating a trillion dollar holds very little difference to what they’re doing every day anyway – creating money out of thin air. It was almost as if the government knew that this was such a preposterous idea that they knew if they leaked it, and then dismissed it as a ridiculous idea it would restore the nation’s confidence in the government.

Let’s be clear, there is no easy way to get out of this financial crisis. And if there is, platinum coins aren’t the precious metal that you’ll need.

But what’s going on with the price now?

2012 was a tricky year for those not only in gold investment, but also in platinum.

Up until last year, platinum had out priced gold for the previous 20 years. However last year we saw it hovering just below $1,400 whilst gold sat comfortably above $1,600.

For many financial analysts, the platinum to gold ratio can indicate one of two things:

- If the platinum price is higher than gold, the outlook for the global economy is positive and a pick-up in activity is on the horizon.

- If the gold price is higher than the platinum price then investors are concerned about the financial future.

Platinum, unlike gold, is a highly industrial metal, this and the fact it (clearly) has to be mined caused it a lot of problems in 2012 which fed into the price then and continues to do so.

Thanks to its industrial use, the metal is directly exposed to the euro. EU tax incentives means that over one third of cars run on diesel which requires a platinum-only catalytic converter. Therefore, when the Euro-crisis is on everyone’s minds they decide not to buy a new car, platinum suffers, as it did last year. By August 2012, the platinum price had dropped 28% from a year before. And further declines were still to come.

Now, 2013 has started on a positive for the platinum market; whilst the price has been rising, the gold price has been fairly stagnant causing the platinum to overtake the gold price. Platinum’s recovery in 2013, however does not necessarily mean that the economy is picking up or people will be buying themselves new cars this year.

Platinum supply will support the price

This price rise is most probably down to exploration and industrial changes. The price hitting below $1,400 (mine-production costs) last year stalled any investment in new mines taking place. The low price would have meant any high cost producers were losing money. This is turn reduces supply output for the coming year.

Last time platinum significantly outperformed gold was back in 2008, when power was cut to South Africa’s mines, which account for 75% of the world’s platinum supply.

History is now repeating itself as last year strikes at platinum mines, thereby preventing any mining, made international headlines. Anglo American Platinum (Amplats) accounts for 40% of the world’s platinum supply continue to be hugely affected by the pay and working condition disputes. This has now turned to affect the price forecasts for the next 12 months.

As a result of the disputes, Amplats has released a comprehensive business review. Many expected them to announce lower production as high-cost mines are suspended, but perhaps not as dramatically as they did. Four South African mines are to be closed, affecting 14,000 jobs (24% of its workforce) and reducing platinum output by 400,000 ounces. Considering the markets were braced for a supply reduction output of 250,000, this was unexpected.

Supply is an on-going issue when it comes to the platinum market. Many speculate that we are now in a supply deficit, as Johnson Mathey pointed out late last year – production continues to decline on an annual basis.

Whilst the price looks good for now, we mustn’t associate the high price and talk of platinum saving the US economy from financial Armageddon together.

Platinum, as with silver and palladium, will always be compared to gold. Concerns are raised however when it does something out of the ordinary and the press suggest it’s a better bet than gold. Whilst platinum is likely to return to form this year and outperform gold, this does not mean gold is no longer a worthwhile investment.

As we often discuss on these pages, both work to play different roles in your portfolio – platinum allows for greater diversification and for greater speculation and profit potential, whilst gold’s ability to maintain its value over long periods of time make it a superb savings mechanism.

Disclosure: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.