The Platinum Group Metals (PGMs) are a family comprised of 6 metals - platinum,
palladium rhodium, iridium, osmium and ruthenium. But for our purpose today
(and for most investors), we are only interested in the first two - platinum
and palladium.
Platinum is usually more expensive than gold. But for well over a year, it
actually traded for less - substantially less. One could purchase a troy ounce
of platinum for $150 or so less than a troy ounce of gold. (As a side
note, during the time of this unusual inverted pricing relationship, in expectation
of the "norm" reestablishing itself, I placed a long platinum/short gold spread
trade. Of course, this did indeed take place and I was able to make a good
profit on the trade.)
That relationship has reverted to its historical norm, and at this writing
platinum now trades for better than a $150 premium to gold. Interestingly,
during the 40 years before the 2008 financial crisis, platinum traded at a
premium to gold of between 30% and 180%. Since then prices for the two have
become much more closely correlated. What's also true is that platinum (and
palladium) being such relatively small markets, have demonstrated the potential
for being much more volatile on both the upside and the downside compared to
gold.
Over the last couple of years, we have paid more than the usual amount of
attention to this evolving precious metals 'sidebar' story. We have extensively
covered an intriguing Canadian project via on site/video interview visits,
as well as issuing special reports/company analyses in The Morgan Report -
all available to subscribers on the silver-investor.com site.
What's so intriguing?
First is the overall size of the platinum/palladium market. Like silver, the
PGMs can be thought of as 'two-doors metals". That is they have industrial,
as well as investment demand. A strong case can be made that both of these
demand components have the potential to grow substantially going forward. If,
compared to other investment vehicles like bonds, real estate, tech and bio
stocks, the gold and silver markets (including mining shares) are small, the
platinum market is tiny - and Palladium's is infinitesimal!
The world supply of platinum is about one-tenth that of gold; less than one-hundredth
that of silver. (It's been stated that all the platinum ever mined would fit
into an average American living room.) Whereas during the 1980s and '90s above
ground inventories were largely in surplus, since 1996 net reduction has swung
this picture into the deficit column.
Russia and South Africa alone account for around 86% of global platinum production
- which has been declining for both since 2006. North America and Zimbabwe
supply 4% each, with "Others' making up the remainder. As overall production
struggles, recycling plays a key role in filling the gaps. Demand components:
Auto industry (catalytic converters - generally for gas burning engines) 30%;
Jewelry 28%; Industrial uses 35%; Investment c. 8%.
It's estimated there are over 5 billion ounces of above ground gold, compared
to about 200 million ounces of platinum. Unlike gold, there are no large stockpiles.
So while the metals in nature are equally rare, annual platinum mined equates
to only a small fraction of that for gold. Indeed, for 2012, Johnson Matthey
reported that platinum supply was approximately 8.5 Moz (mining 6.5 + recycling
2 .0 Moz respectively). For palladium, supply was about 7.4 Moz. In comparison,
global gold production was around 2,500 metric tons or a bit over 80 million
troy ounces.
For a number of applications, platinum is actually more favored by jewelers
than gold. It is 10% more dense extremely durable and does not need to be 'enhanced'
with other metals, as gold does, e.g. in the creation of 'white gold'. To express
certain attributes in its fabrication, gold needs to be combined with palladium,
nickel or rhodium.
Palladium marriage ring w/diamond halo settings/platinum prong rings
Erik Stewart Jewelry
Though platinum was only officially discovered in the 1700's (the Spaniards
ran into it in the 1500's while mining for gold and silver in the New World),
ancient indigenous South Americans used it in ceremonial jewelry. Still farther
back in history, caskets in ancient Egypt have been found adorned with gold,
silver - and platinum.
Not known to exist in Canada until 1888, it was discovered in Sudbury, Ontario,
alongside copper and nickel deposits. Sometime thereafter, until the early
1950's Canada was actually the world's largest platinum producer, before being
supplanted by South Africa.
Sprott's Thoughts points out just how complex and dangerous the mining
of gold and PGMs in South Africa can be. Relatively thin ore seams slope downward
and instead of a mechanized approach, must often be dug out by individual miners
operating along cramped, narrow stopes. As Sprott's Andy Jackson notes:
"It's a really nasty job for the guys in the mines. It's hot and it's cramped.
It's also dangerous - there are rock falls and 'rock bursts' simply because
of the pressure. All kinds of things can go wrong at that depth."
Typical Reef Mining in South Africa Courtesy Ivanhoe Mines
Palladium - an even more compelling narrative
Now consider that palladium is 15 times rarer than platinum. Often found as
a byproduct of platinum, around 68% of its annual supply is used in the automotive
industry in catalytic converters (preferred for diesel engines). An additional
4% goes into jewelry, 7- 8% for dental, 14 % for electrical and 8% to "Other".
40% of the world's palladium supply comes from a single location in Russia
(Norilsk), though several North American mines produce it as well. Platinum
and palladium are so critical in many industrial uses that Japan has designated
PGMs to be one of the most important metal categories in its national resource
acquisition policy.
Stillwater Mining Chart
Palladium-containing components are used in an array of electronic devices.
It is utilized in a new type of composite metallic glass, called "DH3", under
development by the California Institute of Technology. Benefiting from palladium's "high
bulk to shear ratio" it is reputed to be as tough as steel. It is a component
in some fuel cells, and is in demand from the healthcare industry in dentistry
and medicine. A process using palladium nanoparticles has been developed, enabling
synthesized drug delivery to precise locations inside the human body.
This brief discussion would not be complete in my view, if we did not examine
what happened to the palladium market in the early 2000's. We had clear evidence
of an industrial driven demand taking the price sky high in "panic" buying.
At the time, Ford Motor Company and others were moving from platinum to using
the less expensive palladium in catalytic converters, in order to save money.
This PHYSICAL demand by Ford drove the palladium price to approximately $1100
per ounce! Furthermore CLEAR EVIDENCE of how the paper and the physical price
were able to separate greatly.
In order to stay in the Futures Market (the paper game) contract holders were
required to put up 2X the physical price! Yes, you read that correctly - you
had to pay TWICE the amount of the physical delivery price, in order to keep
your paper claim! Obviously the exchange wanted as many traders as possible out of
the paper market!
This is brought to your attention, because few people know of these facts
and many have asked me over the years if this will (or could) happen in the
silver market. To that question, let me simply state--we already saw it take
place in one of the other white metals...so be prepared!
Like Silver, PGMs are 'restless metals'
Platinum and Palladium generally trade in a reasonably identifiable price
ratio with each other, but on occasion, they are fully capable - as the charts
below demonstrate - of creating solo price surge moon shots. They tend to rise
alongside increasing gold and silver prices too, but here again they can make
large moves on their own.
Palladium - currently, First among Equals?
As you look at chart formations of 'the big four' precious metals, which seems
to have the best looking pattern these days? I'd say...Palladium.
PGM ETPs - An evolving investment demand dynamic
An Exchange Traded Fund (ETF) is a security that tracks an index, commodity
or basket of assets. As a category, these products, including ETNs and various
trust-type vehicles are generally referred to as Exchange Traded Products (ETPs).
Most people probably assume that resource sector ETP holders are either individual
investors, or managers of hedge and investment funds. However, in addition
to being merely an investment vehicle, it is conceivable that physical metals'
supplies could - and are - being accumulated for eventual use within a given
country as part of a strategic reserve. Confirming this premise, a Mitsubishi
Corp official has been quoted as stating, "In a broader sense (ETFs), allow
Japan to accumulate a stockpile of physical precious metals domestically by
storing them in warehouses designated by MC within the country".
The rise of gold and silver ETFs, especially GLD and SLV respectively, have
had a significant effect on the price of precious metals over the last decade.
What we've seen happen with available supplies of gold and silver is now in
the process of taking place with platinum and palladium.
Several ETFs have been created to purchase and hold the PGMs. Earlier this
year in just 6 months, an ETF set up in South Africa, took over 150,000 ounces
of platinum off the market.
A possible palladium choice is the ETFS Physical Palladium Shares (NYSE: PALL),
with good liquidity, trading as much as 50 - 80,000 shares/day.
Another example is the Sprott Physical Platinum and Palladium Trust (NYSE
Arca: SPPP), an exchange-traded investment alternative (ETP) to holding the
physical metals. The trust purchases palladium and platinum in equal dollar
amounts, resulting in a 2:1 Pd/Pt ratio. This is a closed end fund, which can
trade at a premium or a discount to its net asset value (NAV), since, unlike
an ETF, it does not "rebalance" itself in real time.
Canadian Palladium Maple Leaf 1 Troy Ounce Rounds
Demand is King
At Silver-Investor.com we like the story of how the early Spaniards dealt
with platinum when they first ran across it in alluvial deposits in nugget
form - which for platinum is rather uncommon since it is normally found in
association with other metals. They named it "platina" - 'little silver' and
tossed it back, presumably to mature and become more silver-like later on.
Of course, we now call it "platinum".
While remaining mostly focused on the price movements of gold and silver -
as you should - consider also looking more deeply into the potentially-explosive
PGM supply-demand situation. What is now being established is a trend of
falling supply and rising demand. If you find this story to be compelling,
pay particular attention to how palladium's price handles upside resistance
levels near $780/800/850. (Platinum has to contend with a series of resistance
belts in the areas of $1550/1600/1750/1800, and finally 1900.)
Don't be too concerned about nuances in the supply side when you hear a talking
head comment that "supplies of PGM's are increasing" or "there may be a slight
surplus next year," etc. As I have often stated and will continue to repeat:
"Being in surplus does not have as much effect on price as investment demand
- if it did, gold would still be under $300 per ounce, and it is NOT! Markets
move on demand; whether that demand is industrial or investment means little
to the market - demand is the real driver."
David Morgan (Silver-Investor.com) is a widely recognized analyst
in the precious metals industry; he consults for hedge funds, high net-worth
investors, mining companies, depositories and bullion dealers. He is the publisher
of The Morgan Report on precious metals, the author of Get the Skinny
on Silver Investing, and a featured speaker at investment conferences in
North America, Europe and Asia. Readers can receive a free 30 day trial to
TMR (The Morgan Report) by g
oing here.
