The best-known precious metals, gold and silver, are reasonably well understood by investors.
Gold is an almost entirely monetary metal with negligible industrial use. So the price is driven to a great extent by how confident investors feel about the financial system. Silver has both monetary and industrial uses. This is one reason why it tends to be more volatile than gold. Industrial demand for the metal suffers when the economy is weak. But it also benefits somewhat from fears about currency devaluation and financial instability.
But what about the other major precious metal, platinum? I've had a lot of emails asking about it recently, so today I want to take a look at it. What's it used for? Where does it come from? What's the outlook? And most importantly, how can investors play it?
Platinum is an astonishingly rare metal. It's often obtained as a by-product of nickel and copper mining. Some 80% of global production comes from the Bushveld – an area about the size of Ireland – near Pretoria in South Africa. The rest comes from the large copper-nickel deposits near Norilsk in Russia and the Sudbury Basin in Canada. There are also smaller reserves in the US, mostly in Montana.
Even although it's a precious metal, platinum's uses are largely industrial. Just under half of annual production is used in car emissions control devices, or catalytic converters. About another fifth is used in jewellery. Smaller amounts are used in the electronics, chemical and medical industries.
What drives the platinum price?
So what drives the platinum price? Well let's start by looking at how it's behaved over the past decade. The platinum chart below is almost interchangeable with any other metal, the commodities index, house prices – even stock markets since the 2002 lows. It's your classic anatomy of a bubble.
Platinum spent the 1990s trading in a range between about $350 and $450 per ounce. Then in 1999, like practically every other commodity, it began to take off. In 2006, then again in mid-2007, it tested the $1,300 mark. Then, in late 2007 and early 2008, in the space of just a few months, amid the South African energy crisis (more on that in a moment), it almost doubled again, reaching a high just below $2,200 an ounce, a gain of some 600% from the lows.
Then the bubble burst. And in just four months, platinum gave back four years of gains, dropping by about 65% to $774 an ounce. But since the lows of October / November 2008, the metal has rallied tremendously, like virtually every other asset class (except stock market puts). It has now more or less doubled.
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So what's the outlook now? A good start is to compare the platinum price to the gold price. The received wisdom is that during periods of sustained economic stability and growth, the price of platinum will trade at around twice the price of gold. We saw that in the early part of this century (see the chart below, which shows the ratio of the platinum price to the gold price since 1999). That's because when economic growth is strong, industrial demand for platinum is high compared to demand for gold.
However, during turbulent times, demand for gold surges as people seek it out for its monetary, wealth-preserving value. Meanwhile, industrial demand falls, making platinum less attractive, so the ratio falls to about 1:1. We saw that at the bottom of 2008's bust.
There is another specific issue to be aware of. As I noted earlier, most platinum comes from South Africa. So it's very vulnerable to problems there, be they political or, as in 2007-8, energy-related. And South Africa's energy problems are far from over. The infrastructure is just not there. So one trading strategy for the patient would be to hoard the metal, wait for the power to the mines to be switched off, then sell into the rally as the price spikes.
But assuming that South Africa keeps the lights on for now, what's next for platinum? That largely depends on whether you're an inflationist or a deflationist. If you believe that quantitative easing has worked, and that we are just ten months into another period of sustained asset price inflation and a new secular bull market, then buy platinum. Even if you think that quantitative easing will destroy currencies and cause hyperinflation, you'd still do well to turn your cash into hard assets such as platinum. Then take it with you, along with your guns and tins, to your hide-out up in the hills.
But if you think that this rally is getting long-in-the-tooth, and that the next downturn is not too far around the corner, and that deflating credit will outweigh government money printing, then you should take profits on your existing platinum holdings.
How to play platinum
My own views tend towards the latter scenario. Don't get me wrong - I like platinum. There are lots of exciting companies in the sector. The rally may have further to go. But by getting in now, you're buying into something that's gone up 100% already this past year. Given all the uncertainty out there, I'm sure there will be better opportunities to buy platinum further down the road.
So I'd hold off for now. But for those interested in getting exposure, the simplest way to play platinum is to buy the metal itself. You can do this through a bullion dealer or via one of the bullion vaults, such as Goldmoney. For shorter-term holdings, ETF Securities has exchange-traded products which track the platinum price, including ETFS Physical Platinum (PHPT).
You could also look at the miners. Do bear in mind that these will tend to outperform the metals on the upside and get hit harder on the downside. The world's biggest pure platinum play is Anglo Platinum. But if you prefer the volatility and excitement of a junior, you might consider taking small stakes in Platmin (TSX:PPN / AIM:PPN) or Platinum Australia (ASX:PLA / AIM:PLAA) (in which I own a small amount of stock). Both operate in South Africa.
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