Platinum
The Most Precious and Overlooked
Precious Metal
Mark O'Byrne
Jan 17,
2008
Why Platinum Remains a Strong Buy
Introduction
Gold and Silver Investments Limited continue to be bullish on
precious metals and bullish on platinum. Platinum has recently
hit new record highs at $1590 per ounce along with gold. Even
though platinum has surpassed its 1980 high of $1,070 per ounce
in nominal terms, it is still only some half the price of its
inflation-adjusted high of $2,800 per ounce. We believe this
high will be reached in the next 5 to 8 years in this new supply/demand
driven secular bull market in platinum.
Platinum - Extremely Rare 'Strategic
Metal'
Platinum is the rarest
of all precious metals. Total annual world production is about
7 million ounces, a mere 10% of the world's annual gold production
of 76 million ounces. It is so rare that the US government considers
it a "strategic metal" and banned its ownership and
use in World War II for non-military purposes.
Growing Industrial Demand
While platinum production is only some 7 million ounces, demand
for platinum has increased from about 2.6 million ounces in 1975
to more than 7 million ounces today.
Platinum demand has soared,
and looks set to keep on growing through 2010, as diesel vehicles
make up a bigger share of the global auto and truck fleet. Platinum
demand from diesel catalytic converters is projected to hit 1.9
million ounces in 2005 and 3.3 million in 2010. Thus creating
a supply demand imbalance. Platinum is an essential industrial
commodity which is used worldwide in the manufacture of nearly
20% of all consumer goods. New uses are being discovered all
the time. It has a resistance to corrosion, an extremely high
melting point, excellent electrical conductivity, and high durability.
It is a precious metal that is constantly used in new industrial
applications.
Platinum has a wide variety
of uses and applications in electronics, chemical processing,
petroleum refining, medical and dental applications and glass
dies. Significantly, it is increasingly important in environmentally
friendly applications in the transport sector and increasingly
needed for applications in fuel cells and other new technologies
in order to combat global warming. About 1/3 of production is
now used in automotive applications particularly in emission
control catalytic converters.
Platinum's beautiful silver
blue colour makes it in high demand for prestige jewellery which
accounts for some 40% of global demand. While the high price
of platinum is leading to some 'substitution' and use of palladium
and gold, the increasing wealth of some 4 billion Chinese, Indian
and Asian consumers is projected to lead to increasing demand
for all precious metals.
Growing Investment Demand
In recent years investment
demand for platinum has also been increasing. There has been
significant buying of platinum by investment funds in the last
few years. Investment has not been limited to hedge funds as
private investors, mutual funds and pension funds have all been
increasing their commodities exposure through both futures and
ETFs.
Just recently (May, 2007),
Novartis, the large Swiss based multinational pharmaceutical
company's pension fund announced plans to invest four percent
of its 14 billion Swiss francs ($11.37 billion) in platinum and
the other precious metals. They are investing some half a billion
Swiss francs in each of the precious metals - 1% in each precious
metal gold, silver, palladium and platinum.
Investment demand is increasing
due to the recent introduction of new platinum ETFs in London
and Zurich. It has been claimed that a platinum exchange-traded
fund (ETF) in the US is unlikely to materialise in the near future.
Platinum mining companies had been concerned that the launch
of a platinum ETF in the US would result in demand outstripping
supply, causing prices for the precious metal to jump considerably.
Johnson Matthey said the launch of exchange-traded funds in platinum
will likely "apply further upward pressure to the price".
Limited Sources of Supply
On the supply side
the only meaningful deposits of platinum are found in South Africa
and Russia. Importantly, 90% of total global platinum supply
comes from just these two countries. These major producers are
cutting back their production targets and platinum production
fell last year for the first time since 1999. Demand exceeded
output by 265,000 ounces, the biggest gap since 2003, according
to Johnson Matthey.
Total global platinum production
only represents about 6% of global gold production and less than
1% of global silver production. In addition to platinum being
limited in supply it requires mining a lot of ore (8-10 tons)
and it is very energy and capital intensive just to obtain one
pure ounce of platinum.
There exists considerable uncertainty
with regard to future supplies as there does with many finite
resources. There is little available data on Russian reserves
while reserves in South Africa, who are responsible for some
80% of global production, are dwindling. Political or economic
problems such as strikes or nationalisation in either country
may greatly affect the supply and thus price of this precious
metal.
With platinum a rare metal, difficult to find and to mine, with
supplies predominately in one country yet with important industrial
and military applications a huge squeeze could occur if there
were disruptions to South African or Russian mining production.
These disruptions could come in the form of strikes or political
tensions in Russia where Putin is increasingly flexing his muscles.
Thus platinum is a metal that remains susceptible to supply shocks,
maybe even more so than gold or silver.
Price Performance
Precious metals perform
well in times of less benign economic conditions. For example
in the stagflationary 1970's when there was low economic growth,
rising inflation, rising interest rates and ultimately an oil
crisis, precious metals and platinum, due to their counter cyclical
nature, outperformed all other asset classes. Platinum went from
$90 per ounce in 1971 to more than $1,000 per ounce in 1980 for
a return of some 1000%. In the same period gold soared from $35
to over $850 and silver went from $2 to over $50.
How has platinum performed
in recent years? It is one of the top performing asset classes
and has gone from $350 in January 2000 to nearly $1,600 recently
for a rise of some 350%.
Gold is up by more than 230%
($270 to over $900) and silver is up by 240% ($4.70 to over $16)
in the same 8 year period.
While these returns are significant
and may lead investors to fear that the best gains have passed
it must be remembered that other commodities such as the grains,
soft commodities and base metals are also up by far more than
platinum.
The performance of oil, uranium
and other base metals in recent years may be pertinent in this
regard:
Oil is up from $10 to nearly
$100 or 1,000% and more than 10 fold.
Zinc from $.35 to a high of $2.00, now $1.50/lb or nearly 5 fold.
Copper from $.75 to a high of $4.00, now $3.32/lb or nearly 5
fold.
Lead from $.20 to $1.60/lb or nearly 8 fold.
Nickel from $3 to $13 (high over $24/lb) or more than 4 fold.
Indium, Molybdenum, Selenium, Cobalt are all up 1000% or 10 fold
and more.
Uranium has risen a phenomenal 1300% or 13 fold prior to a recent
correction.
Many commodities are up between
5 and 13 fold. Platinum is only up some 350%. If platinum were
to catch up with these other less rare and less precious metals,
it would have to increase in value significantly.
Also it is important to remember
that the Dow Jones Industrial Average rose from 1,000 in 1980
to nearly 12,000 in 1999. It was thus up nearly 12 fold in 19
years. Those who sold when the Dow Jones had risen to 4,000 in
1996 missed the most profitable phase of the bull market - the
final phase of any bull market is always the most profitable.
It is important to continue
to make the trend your friend in all the precious metals. Volatility
will increase and there will be sharp sell offs but the medium
and long term fundamentals of all the precious metals remain
more than sound especially in the light of the unprecedented
and deteriorating global credit, systemic and monetary crisis.
Conclusion
Since industrial and
investment demand for platinum keeps growing while mine supply
remains relatively fixed, the price of platinum is likely to
exceed its 1980 inflation-adjusted high.
According to a study by Wainwright
Economics, a respected Boston-based investment research and strategy
firm, platinum is the leading indicator of inflation. It is a
better inflation indicator than oil and the CRB (commodites)
[commodities] Index. According to David Ranson,
president of Wainwright Economics, "The only asset class
that is better than gold as an inflation hedge is a basket that
includes silver and platinum." The precious metal component
of a properly diversified portfolio should include an allocation
to platinum. Full diversification within the precious metal group
is important in order to reduce volatility, thereby improving
performance in the entire portfolio.
At the dawn of the 21st Century
precious metals are again being realised as important assets
to have in a properly, holistically diversified individual or
institutional portfolio. The precious metals of platinum, palladium,
silver and gold are the only asset classes academically proven
to have an inverse correlation to conventional assets such as
stocks and property which is important in an era of record debt
levels, record oil prices, increasing credit, systemic and monetary
risk and increasing economic and geopolitical tension.
While platinum may be overbought
in the short term, the fundamentals of platinum for 2008 point
towards another deficit year in the platinum market and a continuing
rise in prices seems more than likely. Platinum started 2008
at $1530 per ounce and should platinum return 30% in 2008 then
it will reach the psychological level of $2,000 per ounce.
Charts courtesy of Bullion
Marketing Services
How to Invest in Platinum Today
Shares in platinum mining companies can be bought but
they are far more risky than owning the physical, tangible asset
as mining companies have country risk. Two of the largest platinum
producing countries in the world are Russia and South Africa.
Mining shares also have accounting and company risk in the form
of depending on the performance of employees, management and
auditors and considerable risk in the form of political interference
and nationalisation, environmental risk, natural disasters and
mining accidents.
ETFs are a great way to speculate on prices in the
short term. However, costs make them expensive for those with
a medium to long term horizon. The ETF costs are not solely the
0.4% per annum compounded. There are also stamp duty charges
and broker fees. And the ETF has the bid/offer spread which is
generally some 0.20%. These are derivatives that track the metal
price and there is counter party risk with regard to auditors,
custodians and sub custodians.
Platinum Bullion is available for investment through
coins and bars for delivery or in allocated accounts. Reputable
dealers sell investment grade legal tender "platinum eagle"
coins that contain 1 troy ounce of 0.9995 pure platinum. Australia
and Canada also produce investment grade legal tender platinum
coins for investors and international refineries make larger
bars.
The Perth Mint Certificate
Programme (PMCP) is
the only government-backed precious metal certificate
programme in the world. The Perth Mint is Australia's oldest
operating Mint, established in 1899 and is owned by the Western
Australian Government. The PMCP allows investors to own platinum
bullion in unallocated or allocated accounts. There are no initial
or ongoing shipping, insurance, holding or custodial fees and
thus it is one of the most cost effective ways for investors
to own bullion. The Perth Mint is rated AAA by S&P credit
rating agency and is one of the safest and securest ways to own
investment grade gold, silver and platinum bullion.
Mark O'Byrne
email: info@gold.ie
Mark O'Byrne
is Executive Director of Gold and Silver Investments Limited
(www.goldassets.co.uk). He is regularly
quoted and writes in the international financial media and was
awarded Ireland's prestigious Money Mate and Investor Magazine
Financial Analyst of 2006.
321gold Ltd
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