If there is one commodity that has disappointed investors more than any other these past five years, it has almost certainly been platinum.
Most others have had their moment in the sun, even if brief, but platinum has been wretched.
Its day will come. The question is: when?
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Three good reasons for platinum being cheaper than gold right now
We tend to think of platinum as being more expensive than gold – that’s why platinum credit cards are higher status than gold and why, in the world of album certification, platinum (one million units sold) ranks higher than gold (half a million units).
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Historically, platinum has been the more expensive, which makes sense as it is rarer. Typically the platinum price will be 1.25 times that of gold.
With gold sitting at around $1,800 an ounce, therefore, you would expect the platinum price to be trading around $2,250 an ounce.
It isn’t, though; it isn’t even trading at half that. it isn’t even trading at $1,000 an ounce – it’s at $980. On its current trajectory, platinum is going to be half the price of gold at some point over the next fortnight. A mere 15 years ago, it was double the price of gold.
Why the disappointing performance? There are three reasons, as far as I can tell.
There are three main sources of platinum demand around the world: cars – platinum is used in catalytic converters to oxidise carbon monoxide in diesel engines; investment – people buy platinum for the same reasons they do gold and silver; and jewellery.
Since the Volkswagen diesel scandal of late 2015 – when it emerged that diesel engines weren’t quite as clean as they were made out to be – demand for diesel cars has plummeted. Unfavourable taxation has only amplified this.
Meanwhile, many of the investors who in the 2000s might have bought platinum now buy bitcoin. The speculative anti-inflation trade has moved over to crypto.
And, as far as jewellery is concerned, platinum is not as fashionable as it was ten years ago – probably because it is now worth less, and jewellery is a status symbol.
The supply of platinum is hugely centralised: over 70% of annual global supply comes from one region of South Africa – the Bushveld. With one central point of failure, the market is extremely vulnerable. Should something significant go wrong there – strikes, power supply failures, some kind of natural disaster, political disruption – the platinum market has big problems. And platinum owners will make out like bandits.
But for now, things are tickety boo. As the World Platinum Investment Council says this week in its quarterly report, platinum mine supply “continues to recover gradually from the Covid-19-related operational disruptions” and is up by 13% this quarter year on year. For 2021, total mine supply is expected to be up 25% on last year.
Recycling is another major source of supply and that has declined by 9%, but even so total supply is up by more than 7% this quarter.
Meanwhile, because of the semiconductor chip shortage, car manufacturing has not grown by as much as originally forecast – up only 3% in 2020 – and this too has hit platinum demand.
However, tightening emissions legislation means that platinum loadings in catalytic converters are increasing. With the high price of palladium, some substitution has started to occur, with platinum instead of palladium being used in other types of engine.
Vehicle demand is set to increase next year, which should be good for platinum, though the palladium price has fallen dramatically, so we are likely to see less substitution.
Platinum isn’t in short supply – but it might be if green hydrogen ever takes off
As for investment, demand for bars and coins is on the rise, but flows into exchange-traded funds (ETFs) are down. Many are rolling out of ETFs into dividend-paying miners, and many are moving into the considerably more racy crypto markets. Coin and bar demand should remain, however.
As for jewellery, the Chinese currently prefer gold, and they are the big buyers. It’s fashion, so it can (and will) change – but that is the current trend.
For years platinum was in deficit. Annual demand was greater than supply and that pushed up prices. Now there is a surplus and so it is hard to get very excited about this market. That won’t last forever.
The light at the end of the tunnel for platinum investors is green hydrogen; it would seem to be the best route to decarbonisation. Platinum is used in water electrolysers to produce green hydrogen, and also in hydrogen fuel cells, which can power fuel cell electric vehicles. Platinum is key to unlocking hydrogen and will thus be key to meeting global net zero targets.
This is well known, however, and currently the market is going, “meh”. That could mean green hydrogen is too many years away for the market to care, or that the market doesn’t believe the politicians on net zero, or, quite simply, that the market has got it wrong. Or a bit of all three.
But all in all it looks for now like platinum’s doldrums will continue. Until they don’t. And then it will all look very obvious that everyone should have some platinum in their portfolio, rather as we discovered with uranium earlier this year.
Buy when the market is boring and nobody cares, that’s often the time to buy, then wait, then gloat.
Over the past year platinum has ranged between $850 and $1,350. We’re currently at $980 and in a downtrend. If you can pick it up below $900, I can’t see how this goes wrong as a long-term investment – but, as I say, you may have to wait a while.
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