Platinum has been a terrible investment – but I’m sticking with it
At some $400 below the price of gold, platinum is the cheapest it’s been since 2004. Dominic Frisby explains why the platinum price has collapsed, and why he’s still invested.
It's cheap. It offers value. It has enormous potential.
It's been a dog. It's been a value trap. It has cost a great deal of opportunity.
Platinum may be beautiful, but it's been the ugliest part of my portfolio for over a year.
Today, we consider whether it's time to bail.
Platinum is as cheap as it's ever been compared to gold
At one stage yesterday morning, platinum sunk below $800 an ounce. Aside from the crash lows of 2008, when it briefly hit $750, this was the lowest platinum had been since 2004.
As if in testament to how extraordinarily oversold it was, platinum then promptly rallied by more than 5% in the matter of a few hours. As I write now, the price is $843.
Platinum is cheap. Make no mistake about that.
In my gameshow, I sometimes ask the audience, "which is cheaper: an ounce of platinum or an ounce of gold?" The majority of people opt for gold. Instinctively, we think that platinum is more precious than gold it's rarer, for one thing.
Any singer would rather have their album go platinum. A platinum credit card denotes higher status than gold. And, historically, an ounce of platinum is more expensive than an ounce of gold. The long-term average is for platinum to be about 1.2 times higher. In 2008 at one stage, platinum was 2.5 times higher.
And yet here we are in 2018, with platinum at $843 and gold, meanwhile, some $400 higher at $1,254 per ounce. Platinum is worth just 0.67 times the price of gold. This is the lowest platinum has been in the era of floating exchange rates. It is extraordinary.
In short, platinum is cheap, and has been for some time. I've said that many times on these pages. Unfortunately, it's been a total value trap it has kept getting cheaper.
How has it got this cheap? There have been a number of factors at work.
Here's why the platinum price is collapsing
First, the metal is in a bear market. It sounds glib, but do not underestimate the psychology of a falling market. Negative sentiment takes over, just as exuberance does in bull markets, to drive prices to irrationally low levels.
Prices of precious metals tend to be set at the margin. Investment demand often determines that. In the good old days of precious-metal bull markets, many bought platinum as a store of value, whether buying buy bars or exchange-traded funds (ETFs), just as they would gold.
Now that the price is falling, those buyers just aren't there. And who can blame them? Compared to the final three months of 2017, in the first three months of 2018, investment demand was down 26%, according to the World Platinum Council.
Secondly, there's the change in attitude towards diesel engines. Platinum's main use is in catalytic converters (about 44% of annual demand comes from the vehicle industry). The Volkswagen emissions scandal of 2015 when it was discovered that pollution emitted by diesel engines was considerably higher than manufacturers had indicated has changed perceptions.
No matter that Western European diesel demand only accounts for about 15% of overall platinum use; or that platinum demand from the vehicle industry is only down 3% year on year (according to research by the World Platinum Council). Perception is what counts.
The perception now is that diesel is dead. Platinum is dying with it. Electric cars are the future. (Some green transgression will eventually be discovered in electric vehicles, I've no doubt, but that is where we now are.)
Thirdly, the platinum market permanently seems to be on the brink of a deficit that is going to send the price soaring, but it never seems to materialise. The World Platinum Investment Council reports that the global platinum supply relative to demand was yet again in deficit during the first three months of 2018.
Total overall supply was 1.85 million ounces (including recycling from jewellery, industrial applications and catalytic converters). This was down 290,000 ounces from the same measure in the fourth quarter of 2017. Platinum demand was 125,000 ounces higher at 1.975 million ounces. Yet despite the deficit, the price fell.
Fourth, it's not just industrially that platinum is out of fashion. Platinum jewellery is not in vogue in the way that has been in previous decades. Jewellery still accounts for about 32% of annual demand. It's so cheap you'd think everyone would want a piece, but they don't.
Some beautiful actress needs to be conspicuously photographed looking beautiful in a platinum necklace. If the World Platinum Council can't find anyone to do it, then for the sake of my portfolio, dress me up in drag and I'll do it.
A big PR drive is needed to change perceptions.
Finally, there has been political interference in markets. Total mining supply was 1.4 million ounces in the first quarter of the year, with South Africa the largest producer on 985,000 ounces. This may have been 220,000 ounces fewer than in the fourth quarter of 2017, but it should be lower. When prices fall this low, mines should close down operations until it becomes profitable to function. Operating at a loss is a dangerous game.
But the South African government (quite understandably) wants to protect jobs. It does not want thousands of workers laid off. So, for political reasons, many mines have been forced to stay open. It means supply keeps on coming to market and the price keeps on grinding lower and mining companies become even more unprofitable. They're playing a dangerous game.
As John Maynard Keynes once said, the markets can stay irrational longer than you can stay solvent. Platinum could go even lower (though in the short term I think it will rally from such oversold levels). The 2008 low of $750 is beckoning.
But there is only so low it can go. I bought platinum with a five-year plan. We are just over one year in. I can't help thinking this is one I should ride out. Normality will resume one day, but perceptions need to change first. Let's hope that day comes sooner rather than later.