Where next for gold and platinum?

published 7 February 2008

Once again we have seen "how sensitive tight markets are to production hiccups", said Carolyn Cui in The Wall Street Journal. Gold and platinum prices have hit respective new records of over $930 an ounce and $1,820 an ounce as power outages hit mine production in South Africa, which supplies 75% of the world's platinum and around 15% of its gold.

State electricity group Eskom has been battling to keep up with demand due to a booming economy and a lack of investment in new capacity. It will begin rationing power to customers as early as March, implying further supply disruptions.

So what next for gold and platinum?

Even before recent disruptions, South Africa had said its gold output declined 12% last year to 272 tonnes, while local platinum producers Lonmin and Anglo Platinum warned supplies were set to fall. "2006 may have been the peak year of platinum production for a while," reckoned Lonmin's Brad Mills. Platinum has also been buoyed by historically low inventories and demand from the auto sector, where the metal is used in catalytic converters.

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Gold is benefiting from both private and institutional investors seeking a safe haven as concerns over the US economy and credit crunch mount. Meanwhile, aggressive interest-rate cuts in the US are stoking fears of inflation. It's no wonder, then, that JP Morgan reckons gold will average $914 this year and William O' Neill of Logic Advisors sees it hitting $950 soon.