Today we check in on what has been, to put it mildly, one of my weaker market calls of recent years. That is platinum. What has it done? Where is it now? And where’s it going next?
Currently, the platinum price sits at $870/oz. It was $870/oz, a full 17 years ago, in 2003. It’s hard to think of a single asset in the world that costs the same as it did in 2003.
Think of all the inflation that’s taken place since then. A 2003 dollar is very different to the 2020 version. Indeed, I read yesterday that 22% of all the US dollars in existence were created just this year. That money printer is really going “brrrr” – but barely a cent of it is going into platinum.
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Where did it all go wrong for platinum?
Platinum enjoyed an extraordinarily good run in the noughties. It was one of the commodities of the decade, going from a low of around $400/oz in 2001 to a high of $2,285/oz in 2008.
It crashed along with everything else in 2008, rebounded to just shy of $2,000/oz in 2011, and ever since it’s been in what feels like interminable decline.
All metals, whether base or precious, had a woeful time after 2011. But what really did for platinum was the Volkswagen diesel scandal of 2015. Platinum’s main use is in catalytic converters for diesel engines; before the scandal hit, more than half of annual demand for platinum came from the automotive industry.
The scandal, if you remember, was that Volkswagen, which had been trumpeting the low emissions of its diesel engines for many years, was found to have been cheating the tests in the US. By installing a “defeat device” – software designed to pass regulatory lab tests – it had faked emissions levels in some 580,000 vehicles it sold between 2006 and 2015. In real-world driving, the emissions were several times the permissible limits. There followed a change in attitudes towards diesel vehicles, and the big loser has been platinum.
Platinum has spent most of the years since ranging just below the $1,000/oz mark. Then, in the corona panic of March, it got absolutely obliterated, hitting a low of $560/oz. But since then, riding on the coattails of gold, palladium and silver, it had a good summer, going above $1,000/oz, before slipping back to today’s price of $870/oz.
The investment case for platinum
The case for platinum is the same as it was a couple of years ago: it is extraordinarily cheap relative to everything else. We think of platinum as being more valuable than gold, for example. A platinum credit card ranks higher than a gold card. In the record industry, you’d rather go platinum.
Historically, because platinum is rarer and more expensive to mine, it tends to trade around 1.25 times the gold price. Presently, however, platinum is not even half the price of gold. It’s extraordinary, and in ten years time I expect it will look obvious that platinum is “too cheap” and offers an exceptional opportunity.
The thing is, I said that two years ago. That’s the problem with the logic of value investing – it can require a lot of patience.
But if we do get a reversion to the mean, and gold stays at $2,000, then platinum will go to $2,500 – a triple from today’s price of $870. And in 2008, platinum was double the gold price. That’s what possible.
You can compare platinum to palladium as well. Historically, palladium tends to trade around half the platinum price. With platinum at $870/oz you’d expect palladium to be somewhere in the $400s. But it’s trading at $2,375 – almost three times the platinum price. Palladium is even at a 25% premium to gold, which is where platinum “should be”.
Palladium is used in petrol-engine catalytic converters. There is no easy substitute. Demand has remained strong; supply has been constrained. Thus do we have its price.
But, on a value basis, I look at platinum and I think this is not a question of “if”, but “when”. Roughly 40% of annual platinum demand still comes from the automotive industry. Another 30% or so is from jewellery. The rest is from its other industrial uses, especially in medicine, chemistry and glass. Investor demand is tiny, at around 3%.
Total platinum demand is likely to be around 11% lower in 2020 than in 2019, according to the World Platinum Investment Council’s latest quarterly report. However, supply – most of which comes from South Africa – will fall by 14%. Yet despite the fact that this market seems to be perennially in deficit, platinum resolutely refuses to catch a bid.
But it won’t take a lot to move it. A change in narrative will wake up investors, and increased investor demand could put some fuel under the price.
Platinum needs a new narrative – and one’s coming round the corner
My view is that the change in narrative will come from the so-called “hydrogen economy”.
In July, the European Union implemented its hydrogen strategy, highlighting the crucial role that hydrogen will play in decarbonising industry, transport, power generation and buildings across Europe. There’s a lot of political capital in going green – hence Boris Johnson’s recent noises about wind turbines.
Platinum will have a key catalytic role in this. It has a vital role in both the generation of green hydrogen, and in fuel cells for fuel cell electric vehicles.
Perhaps we are sleepwalking into one of those situations in which platinum becomes a key strategic commodity. Everyone will want it and there won’t be enough of it – a bit like cobalt and vanadium a couple of years back. You can’t just press a button and increase platinum supply, it takes years.
It doesn’t help that platinum production is so centred in South Africa – more than 70% of annual supply comes from there – and South Africa has a host of its own problems.
So this has all the makings of being one of those niche commodity bubbles that can make you a fortune if you’re on the right side of it all.
But we may still be a couple of years away from that. Who knows? That’s the magical unknown ingredient – the timing.
As I mentioned last week, I’m in the market for a new motor and I had car-buying agent chum Ashley Winstone of Palmdale Motors, who’s at the coalface of automotive demand, on the phone. He knows what kind of cars people want and why. He seems to think fossil fuel cars have another ten years.
We might have to wait a while, but the fuel-cell narrative will be out long before the cars hit the roads. So the question, as far as potential platinum investors are concerned, is: is this new, green, hydrogen economy really going to happen?
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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