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WHAT MAKES PLATINUM PRECIOUS ENOUGH TO BE
CALLED RICH MAN’S GOLD?
About
2000 years ago, Aristotle explained why gold remained the ideal choice of
money throughout major nations and civilizations. In words that are
just as relevant today, he said "Gold is durable, not like wheat,
divisible, not like diamonds, convenient, not like lead, constant, not like
real estate, and best of all, as jewelry, it has intrinsic value".
Among
the most rare, valuable and sought after metals on Earth, platinum shares
these same characteristics with gold. Platinum Guild International names
platinum as the "most precious" of the precious metals based on its
relative scarcity as well as for the following reasons:
(1)
The annual supply of platinum is only about 6.4 million oz. - which is
equivalent to only 7.4% of the annual gold production and 0.87% of silver's
annual mine production.
(2)
Platinum is exceedingly difficult to mine and extract. For example, rock face
temperatures at Northam Platinum’s Zondereinde mine in South Africa get as high as 162
degrees Fahrenheit and its shafts extend as far as 1.4 miles below the
surface. Overall, the platinum recovery process is very complex and lengthy,
in some cases taking as long as six months.
(3)
There are over 5 billion oz. of above ground gold ($8 trillion), whereas only
an estimated 200 million oz. ($0.3 trillion) of platinum has ever
mined....just 3.75% that of gold $ wise.
(4)
In addition to its high-conductivity, resistance to corrosion and inertness,
platinum is an extraordinarily dense metal. 10% more
dense than gold and 20 times the density of water, one cubic foot of
platinum weighs more than 1,330 pounds (523 kilograms). As Vronsky notes, “that means a six-inch cube of the white metal weighs
about as much as an average man!”
This density, along with its other unique chemical properties, makes platinum
an invaluable component in a myriad of industrial applications.
(5)
Platinum has many more utilities than gold. Unlike gold, more than 50% of the
annual production of platinum is consumed (read destroyed) by industrial uses
(40% alone go to catalytic converters).
(6)
Unlike gold, there are no large stockpiles of platinum (less than 4 million
oz.). Therefore, any disruption in supply from the two major sources (South
Africa at 80%, Russia at 10%) could propel platinum on a similar trajectory
palladium experienced in 2001, when it moved sharply from $350/oz. to
$1,100/oz.
 
VERY LIMITED SUPPLY
While
virtually all other metals can be found in deposit the world
over, platinum is anomalous in that important deposits are essentially
found to occur in just two areas of the world (apart from a small
handful of smaller deposits in North America and Zimbabwe), South Africa and
Russia. Platinum does get produced as a by-product in some regions, but only
in insignificant volumes.
Roughly
80% of the total world's annual mine production comes from South Africa and,
with 88% of the world’s reserves, it is far
and away the most important national player in the platinum market.
Another 10% of platinum supply comes from Russia, with bit players
responsible for the remainder. As South African politicians have tabled
mining nationalization policies in the last 2 years, any further escalating
political instability and/or labor turmoil in South Africa could have a
dramatic impact upon platinum prices - and the same holds true for Russia,
albeit it to a lesser extent .
OTHER REGIONAL PLATINUM PRODUCERS
There
are but a few publicly-traded mining companies that produce platinum, and, in
most of these cases, only as a by-product. An example is the giant nickel
producer Vale-Inco in Canada. Total platinum production in North America is
estimated to be less than 400,000 oz. per year (5% of world production)
according to the British Geological Survey.
GLOBAL PLATINUM CONSUMPTION
Platinum
consumption is typically divided into three categories: 50% industrial uses
(auto catalysts account for majority), 40% jewelry manufacturing and 10% for
investment purposes. With a rapidly emerging middle class, and dramatic
economic growth, China is expected to increase both automobile and luxury
jewelry purchases as citizens continue to accumulate wealth. China has
eclipsed the United States as the largest consumers of cars and is projected
by the IMF to be the world’s largest economy by 2016. In 2011, about
3.82 million ounces of platinum will go into auto catalysts, 17 percent more
than this year and the most since 2007.
INVESTMENT PROSPECTS FOR THE RICH MAN’S
GOLD
Since
1970, platinum has on average commanded a 30% premium over gold. As the
following chart from www.infomine.com demonstrates, from 2000 to 2008,
platinum spent much time trading over 1.8 times gold price.
Historically,
the price of platinum runs in tandem with the precious metals group (gold,
silver, platinum and palladium). However, as platinum is less liquid and has
a smaller investor set, it is much more volatile both on the upside and
downside compared to gold.
Platinum
price appreciation has outpaced gold since 2001, right up until the US financial
crisis in 2008. While gold has recovered from losses and is trading within
15% of its all-time high, platinum price is trading at 2 year low and has yet
to recover.
While
there is mounting concern about global economic growth, automakers are still
expected to sell a record 79.5 million cars and light commercial vehicles in
2012, according to LMC Automotive Ltd., a research company based in Oxford,
England.
Demand
for platinum is also coming from investors, as holdings in exchange-traded
products collectively surpassed 1.5 million oz in
2011 since the first platinum ETF was launched in 2007. Therefore, going
forward, investment demand could be a significant surprise factor in driving
platinum prices higher.
In
2012, we can expect to see:
- Persistent high gold price
- Global recovery of
auto sector
- Platinum investment
demand through ETF and physical possession
- Ongoing limitations
and potential disruptions to supply
All
in all, the current situation bodes well for platinum. Look for it to
trade substantially higher and back at a premium over gold, once the bull
market in precious metals begins its cycle anew. With the current crisis in
the Euro currency and run-away US deficits, platinum might just regain its
reign as the rich man’s gold in 2012.
John Lee, CFA
Goldmau.com
All
other articles by John Lee
John Lee is a portfolio manager at Mau Capital Management. He is a
CFA charter holder and has degrees in Economics and Engineering from
Rice University. He previously studied under Mr.
James Turk, a renowned authority on the gold market, and is specialized in
investing in junior gold and resource companies. Mr.
Lee's articles are frequently cited at major resource websites and a esteemed speaker at several
major resource conferences.
Please visit www.GoldMau for instant market alerts and stock updates.
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