 Make Sure
You Have Some Platinum Stocks in that Gold Portfolio
Kenneth J. Gerbino
Archives
Kenneth J.
Gerbino & Company
Jul 29, 2005
Investors that understand the
logic of owning gold and gold shares should also be aware of
the Platinum Group metals, usually referred to as PGM's. The
main components are Platinum, Palladium and Rhodium. There are
some more exotic molecular hybrids of the group as well but they
are of more interest to scientists than investors. I will focus
on Platinum in this article.
Platinum is actually more precious
than gold and has developed a strong jewelry following to tag
along with it's position as the anti-smog metal
since it is used in catalytic converters on cars and trucks.
The bottom line from an investment standpoint is very simple.
More people are coming into the modern 21st century because of
world progress and technology. China and India automobile consumption
and the normal global replacement of 700,000,000 motor vehicles
in the next 15-20 years will use an awful lot of Platinum.
Most of the Platinum in the
world is found in South Africa (75%) and most of the near surface,
low cost and large, easy to mine deposits have been discovered
a long time ago and the supply portion of the equation will now
start to get very tight in the years to come.
Demand has out stripped supply
for the last six years by an average of 373 tonnes annually.
That's $10 billion a year on average. These deficit numbers the
last two years have been much smaller but I expect this could
change as our 2.5 billion new industrialized friends in India
and China continue to expand even at modest rates including with
some recessions thrown in.
Platinum is mostly used for auto exhaust emission reduction and
for jewelry and many other industrial usages. Auto and industrial
usage takes up about 54% of supply and jewelry takes up about
40%. Most importantly, as the world has to turn increasingly
to diesel engines, platinum will become even more important as
it cannot (so far) be commercially substituted by palladium in
diesel engines for emission control.
Although platinum is the rarest of the precious metals it is
actually essential in the production of a wide range of goods
from gasoline and paints to pacemakers, disk drives and anti-cancer
drugs.
Over 75% of the platinum market
is controlled by South Africa - a de facto monopoly. If one is
looking for large amounts of platinum you have to go to South
Africa. Almost 70% of the platinum in the world comes from an
area in South Africa called the Bushveld. It is the geological
structure of this area that spells out why platinum supply may
not pick up very much in the future. Imagine a great bowl-like
structure 295 kilometers across buried in the ground.
This is the Bushveld geological structure. Mother nature coated
the base of the bowl with a 1-2 meter thick platinum group metal
rich rock substance. The edges of the bowl come close to surface
and the platinum metals can be mined by accessing this outer
area of the bowl from surface. But towards the middle of the
bowl, 1500-3000 meters below the surface a lot of platinum could
be found but the cost of extracting it from such deep levels
is extremely cost prohibitive.
Because the "coating" or reef as it is called is only
at best 1-3 meters wide... it is a small area to extract the
valuable rock. The fact that it is so narrow means all the mining
must be done using a lot of manual labor. Bottom line: This deep
area and the narrow mining widths will mean very high cost production
and supply will be limited.
The next problem with supply is that because the South African
rand has appreciated so much in the last two years, the local
price of platinum in rand terms is not high enough to justify
the high capital costs to start production on several of the
platinum projects in the country - which is bullish for the metal
price. Also the underground mining cost structure is now very
high in rand terms. Therefore some projects may be cancelled
and many are being delayed.
Because most of the world's platinum comes from South Africa
it actually doesn't matter how high the rand goes. If it stays
strong for years, then for a while new platinum production will
be curtailed from lack of investment, new supply will dwindle
and the price will have to go up. Therefore platinum producers
will benefit from the higher metal price, even though their costs
will go up - this is a unique situation.
On the other hand, if gold mining becomes more unprofitable in
South Africa due to the strong currency - and that is why the
S.A. gold mining industry is in trouble - plenty of investment
in gold mines outside of South Africa can still take place because
there is gold elsewhere, and a supply of gold from other countries
would still be available. The reality is that the currency risk
for platinum companies that are producers or who have low cost
operations is nullified because there is almost no where else
to go. Hence, many of the same risks that apply to any other
commodity do not apply to platinum.
Supply of platinum may very well be constrained for many years.
In the meantime, since global populations and middle class consumers
are increasing daily, platinum demand will most likely be improving
for decades. Since the metal is so rare and so useful, this looks
to me like an excellent long-term investment opportunity. Also,
the great hope on the horizon to replace gasoline engines in
the future is fuel cells - and guess what - they rely on platinum.
With any commodity becoming very expensive industrial users find
substitutes and then demand slows. But at $800-900 an ounce this
has not happened to platinum and barring a major global recession
I expect platinum to remain in a high price range.
Now even in the event of a global recession I would expect platinum
to still remain above $550 an ounce. The reason is that during
the last Asian meltdown (1996-99) platinum demand actually increased
from 4.9 million ounces to 5.6 million ounces. During the
U.S. recession in 2001-2002, platinum demand increased from 5.6
million ounces to 6.2 million ounces. There are few goods or
services that can claim what platinum did during those economic
slowdowns.
If you are going to invest in platinum group metal companies
(PGM's), make sure they have a higher grade deposit (over 5 grams
per tonne), have more platinum than palladium and have ground
on the outer rim of the Bushveld. Also if they are already producers
the lower cost structure the better.
The good news about Platinum is that it is not a political metal
and there is no overhanging supply in the hands of the printing
press boys.
Below is a list of my upcoming speaking engagements:
Institute For International Research Commodity Conference:
Tickets $2,195
August 15&16, NYC. Some of the Speakers include: Peter Greer
of PIMCO, Lawrence Siegal of The Ford Foundation, Boris Shrayer
of Morgan Stanley, Kamal Naqvi of Barclays Capital, Mark Vitner
of Wachovia Securities. 888-670-8200. www.iirusa.com/commodity.
New Orleans Investment Conference: Tickets $695
until August 15th
October 30 - November 3. New Orleans. Some speakers include:
Steve Forbes, Doug Casey, Mark Skousen, House Majority Leader
Dick Armey, Jim Rogers, Marc Faber, Adrian Day and Former CIA
Director George Tenet. 800-648-8411. www.neworleansconference.com.
BFI Consulting Inner Circle Wealth Strategies Cruise:
Tickets $5,000 - $15,000
November 26 - December 6. Florida, Bahamas, Virgin Islands. A
sophisticated and high net worth group function for people interested
in Swiss style preservation of capital. Some speakers include:
Harry Schultz, Jim Rogers, Frank Suess and oil entrepreneur C.
Paul Davis.
www.bfi-consulting.com/inner_circle_forum/inner_circle_program.html.
For more commentaries on gold and precious metals, the economy
and stock market please visit our website.
July, 2005
Kenneth J. Gerbino
Archives Kenneth J. Gerbino & Company
Investment Management
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
E-Mail: kjgco@att.net
Website: www.kengerbino.com Copyright ©2004-2016 Kenneth J. Gerbino & Company. All Rights Reserved.
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