Platinum is set to rise – here’s the best way to profit

What’s the most precious metal – gold or platinum?

Ask most people, and they’ll say the answer’s obvious – platinum is the more valuable metal, hands down.

But in recent years, the answer hasn’t been at all clear cut. The price of platinum has regularly dipped below that of gold, sometimes substantially. Even now, gold and platinum are trading at roughly the same price.

This is an unusual situation. And we suspect it won’t last. Here’s why…

The key difference between gold and platinum

If you sit a bit of platinum and a bit of gold side by side, there’s not that much to tell them apart (other than the colour). They’re both shiny. They both make nice jewellery. They don’t rust. They’re both seen as valuable.

And platinum is also rarer than gold. So it seems to make sense that platinum would generally be the more pricey metal.

But in the past five years, this relationship has broken down. And it’s mainly down to the one critical difference between gold and platinum.

Gold is a monetary metal. It’s been used as a medium of exchange and a store of value for millennia. Its perceived value derives mainly from the idea that gold is money.

Platinum is an industrial metal. It has no history at all of being used as money. Its perceived value derives mainly from how much of it is needed by vehicle manufacturers at any given time.

So when people think the financial system is at risk of breaking down, they want gold. A broken financial system is not good news for trade or industry, which means they don’t want platinum. 

This makes perfect sense. And given our own concerns about the global financial system, we’d advise you hold on to your gold.

But now could also be a good time to get hold of some platinum if you haven’t already. Here’s why.

The global supply of platinum is very vulnerable

Two-thirds of world platinum production comes from South Africa. Up until now the platinum companies, like the rest of the mining sector, have benefited from a large supply of relatively cheap labour. This has helped them to keep costs down.

However, it has also given them little incentive to invest in new equipment. As a result, pits and facilities have to use manual labour for tasks that are done by machine elsewhere.

And this has left the mining giants unprepared to deal with a change in the attitude of their workers. Decades of strong economic growth have raised expectations about wages. Trade unions are becoming increasingly assertive and more willing to strike for what they see as a fair wage. 

Last summer a dispute over pay in Marikana ended in tragedy when a series of clashes between the police and strikers left 47 dead and 78 wounded.

The mining sector has tried a number of tactics. One option is to simply agree to pay more. After the deaths, the conglomerate Lonmin agreed last September to award hikes of up to 22%.

But others have simply decided to shut down production. In January, Anglo-American Platinum said it would close four large mines that account for nearly 10% of the world’s platinum supply. A huge public backlash has forced the company to postpone the closure. But it still plans to cut production substantially in the near future.

And even before this latest decision, South African production has been falling. Last year, total platinum output was the lowest since 2001 – 19% down from 2006.

Meanwhile demand for platinum is rising

As well as benefitting from falling supply, prices will be pushed up by rising demand for platinum in catalytic converters, which reduce emissions from car engines.

American consumers are finally starting to make the car purchases that they put off during the recession. Indeed, new car sales in the US are expected to be 18% higher in January than they were this time last year.

Meanwhile China, faced with growing anger over the dire air quality, is about to adopt much tougher car emissions standards.

Overall, Eric Sprott of Sprott Asset Management thinks that platinum demand due to cars (which account for just under 40% of overall consumption) will grow by 7% this year.

There’s another source of rising demand, as a result of platinum’s relative cheapness compared to gold. Jewellery already accounts for 30% of overall platinum consumption. But there are signs that it is making inroads even into areas where gold has traditionally been far more popular. In India, sales of platinum jewellery have grown by 40-50% over the past year. Moves by the government to tax gold imports are only likely to encourage this shift.

How to profit from platinum

There are two ways to take advantage of platinum’s strong prospects. If you want to make a direct bet, you can simply buy an exchange-traded fund which tracks the physical price. ETFS Physical Platinum (LSE: PHPT), which is backed by stores of the physical metal is the best bet, with an annual charge of 0.49%

However, if you’re willing to take on a little more risk, you might consider shares in a platinum mining company. North American Palladium (NYSE: PAL) operates Canada’s only platinum mine, in northwest Ontario. Geologists think that there could be further large amounts of platinum in the adjoining land, which it is currently exploring in conjunction with another mining company.

It’s not a pure platinum play, as the name suggests, but being exposed to palladium is no bad thing – it is also used in the vehicle industry, and is benefiting from many of the same drivers as platinum.

Another option is Stillwater Mining Company (NYSE: SWC), which has a large mine in Montana in the US. It has invested a lot of money to expand future output, which means it should do very well if prices rise. However, it still has a solid cash position that should enable it to survive if prices suddenly fall.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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13 Responses

  1. 01/02/2013, Brian Nathan wrote

    It’s not quite right to say platinum has no history as a store of value. The Russians minted and put into circulation platinum roubles in the mid 1800s. It turned out to be a disastrous adventure when platinum prices fell and holders started selling their stocks.

  2. 01/02/2013, Changing Man wrote

    Surprised there was no guidance on Lonmin who despite the strike disrupting production have just reported better than expected production figures? Shares are on a steep rise as I write! I am already invested.

  3. 01/02/2013, JREwing wrote

    I see so many “silver bugs” but there are no platinum bugs – well, almost. I think Platinum could spike if there was a scramble for physical gold and there wasn’t enough available for a desperate public. And since it is as rare as gold, it makes sense to hold some. But Matthew, this call is about a year late. The right time to buy was when I bought some at way below $1500 last year before the strikes started.

  4. 01/02/2013, BChung wrote

    Platinum is not rarer than gold

    http://www.curiousnotions.com/home/metals.asp

    Its harder & much costlier to extract.

  5. 01/02/2013, Adrian Lloyd wrote

    Matthew,
    the reason that the South African platinum industry is so labour intensive is that it simply isn’t possible to mechanise production (despite millions being invested in research over the last 30 years). This is because the ore occurs in narrow reefs typically 60 to 90 cm wide in very hard igneous rock and the only way to get it out is to use people to drill blast holes with pneumatic drills and blast.

  6. 01/02/2013, Kirill wrote

    Actually, palladium is a much better bet than platinum. In fact, this metal, not platinum as the author suggests, benefits most from the growth in vehicle production in both China and the USA. This is because the vast majority of cars produced in these countries and elsewhere in the world, except Europe, are equipped with gasoline engines which favour palladium based autocatalysts. It is only in the European car market which is dominated by diesel powered cars, platinum still remains the main catalytic metal. At present the future does not look bright for this market at all… That said, platinum is still a reasonably good bet but for different reasons and strong demand for this metal from carmakers is certainly not the one of them. At least, not in 2013.

  7. 01/02/2013, Kirill wrote

    Actually, palladium is a much better bet than platinum. In fact, this metal, not platinum as the author suggests, benefits most from the growth in vehicle production in both China and the USA. This is because the vast majority of cars produced in these countries and elsewhere in the world, except Europe, are equipped with gasoline engines which favour palladium based autocatalysts. It is only in the European car market which is dominated by diesel powered cars, platinum still remains the main catalytic metal. At present the future does not look bright for this market at all… That said, platinum is still a reasonably good bet but for different reasons and strong demand for this metal from carmakers is certainly not the one of them. At least, not in 2013.

  8. 01/02/2013, Bapodra Investments wrote

    If we are talking about which metal is set to rise then Tin is the metal we should be talking about. It is not difficult to say Platinum is set to rise after it has risen and is still in an uptrend. Anyone can state the obvious. However Tin does not get the media attention it deserves as it is a much smaller market to trade. However Tin was the best performing metal in 2012 and is in an uptrend. Why is Matthew not talking about Tin? Also I agree with Palladium which has performed better than Platinum and maybe has more upside potential that Platinum from the current position. Moneyweek needs to really focus before printing such articles.

  9. 03/02/2013, 5wift wrote

    Palladium and platinum are both vital catalysts for industrial use, for both vehicle exhaust catalysts and for fuel cells for instance. So you might think increasing demand was assured. But they are so expensive there is a huge incentive to find alternatives or minimise the amount needed for each catalyst. Have you considered the impact of nano technology in greatly reducing the amount of these metals needed to create the desired effect? I suspect this will happen soon, indeed it’s probably already happening.

  10. 04/02/2013, Aff wrote

    you invest in an ETF you are diverted away from the metal itself and into a paper market where you trust that your certificate represents real metal somewhere in some vault in your name. In reality most etfs do not hold enough metal for all investors as you’d find out if there was a run on it with everyone wanting delivery. If these metals reach a mania phase, this scenario could very well happen in reality. If I wanted platinum, I’d buy some platinum bullion.

  11. 08/03/2013, Poutine wrote

    One month later … platinum price isn’t bull but … bullsh it

  12. 08/03/2013, Poutine wrote

    One month later … platinum price isn’t bull but … bullsh it

  13. 21/09/2013, BULLIONBOY wrote

    With all this talk about the monetary metals, most ignore the PGMs. Good or bad? I don’t know. But I have diversified my portfolio to include gold, platinum, palladium, alot of silver (britannia coins only) and an ounce or two of rhodium http://www.purametal.co.uk/Rhodium-Bullion-Bars-s/1906.htm ….just in case. A huge spread though so won’t be seeing profit anytime soon. Something for the grandchildren one day me thinks.

Commenting on this article closed

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