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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Platinum’s Upside Potential

Commodities / Platinum Jan 20, 2012 - 11:37 AM GMT

By: Przemyslaw_Radomski

Commodities

Best Financial Markets Analysis ArticleThere are certain dogmas held sacrosanct by precious metals investors and one of them is that platinum is supposed to be more expensive than gold. That’s just the way it is. Quite a few eyebrows lifted and jaws dropped last fall when the yellow metals price overtook that of platinum. The historic switch took place on Sept. 2nd when Comex gold futures settled at $1,875.25 per troy ounce, just above platinum’s closing price of $1,873 per ounce. When you consider the price history of the two precious metals—platinum has traded at a $200 to $400 premium to gold—the reversal was astounding. Just to give you a better idea, before the 2008 Lehman Brothers crash, platinum was trading at more than $2,270 per ounce while gold was trading under $990 an ounce.


Platinum is much more rare in nature than gold. More than ten times more gold is mined each year than platinum. Unlike gold, which is either held in bank vaults or used in jewelry, more than 50% of the yearly production of platinum is consumed (used up) by industrial uses, mostly in the automobile industry. Some 40% is used for jewelry manufacturing and 10% for investment purposes. The Japanese seem to be very fond of platinum as they account for 95% of the platinum jewelry demand. There are reports in the press of a nascent interest in platinum jewelry in India, expected to make up 25%-30% of the total Indian jewelry sales in 2012.

The annual supply of platinum is only about 130 tons, equivalent to only 6% (by weight) of the total annual gold mine production. It is less than one percent of silver's yearly output. Unlike gold, there are no large inventories of above-ground platinum. Therefore, any breakdown in the two major supply sources, South Africa and Russia, would catapult the price of platinum. An even more intriguing fact is that more than 90% of the world's platinum production comes from only four mines: three in South Africa and one in Siberia.

During economic expansion, platinum prices tend to outpace gold given its dual role as both a precious and industrial metal. But when the economy slows down, platinum can often stumble. For example, platinum dropped below the price of gold back in the early 1980s, pushing the spread below 1.0 for the better part of 5 years as the economy slowly recovered.  During the 2008 financial collapse, platinum prices fell from $2,252 to $774, a drop of nearly 65%. Both metals crashed. Gold nosedived due to hedge funds liquidations and investors dumped platinum bracing for a recession expected to flatten automobile sales. The metals reached parity in December 2008 as the price of platinum sunk amid the global financial crisis and a collapse in auto demand. Gold has since has put on a show stopping comeback reaching a high of $1,900 last summer, but platinum has yet to bounce back.  As this goes to publishing, the price of gold is $1,655 and the price of platinum is $1,515.

Let’s take a look at the chart featuring platinum. You will see platinum at the bottom of the chart below and the platinum-gold ratio in its main (charts courtesy by http://stockcharts.com.)

On the above platinum to gold ratio chart (if you’re reading this essay at www.sunshineprofits.com, you may click on the above chart to enlarge it), we see an anomaly unlike anything seen in recent years. There have been several small breakdowns below the level of previous lows but none have held.

Platinum’s extreme undervaluation is not something is likely to persist for much longer. The ratio is now at 0.92 and once it begins to move higher, much more platinum buyers are likely to enter the market. Platinum’s price below the one of gold is something that investors view as a buying opportunity (as seen on the above chart) so the only factor that remains in place – preventing prices from moving higher – is fear. Once it subsides as investors see that platinum is not breaking lower, they will buy. This action will likely result in platinum to soon be outperforming gold, something which has not been seen for some time (except earlier this year).

Summing up, it appears that the situation in the platinum to gold ratio and for platinum itself is favorable and if you’ve been planning to diversify your holdings, it might be a good idea to consider this particular metal.

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Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
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    All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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