By Trevor Raymond, Director of Research, World Platinum Investment Council
The unfolding shift in the economic cycle is likely to see inflation and volatility in financial markets return to the fray. Investors are rightly, therefore, re-exploring the benefits that precious-metals exposure can bring to a portfolio. Many investors in this asset class are reluctant to look beyond the initial glitter of gold and, hence, we believe that platinum at present prices represents a fascinating contrarian trade.
AS GOOD AS GOLD?
Gold’s continued push toward five-year highs is evidence of the market’s growing demand for safe-haven physical assets amid tightening global economic conditions. Gold is now arguably overbought, and it is worth reminding the market that the long-term investment qualities so coveted in gold are also present in platinum — a much rarer precious metal with a more compelling value/price story to tell.
Despite their similar qualities, gold’s status as the market’s go-to investment metal stands by virtue of its long history as a store of value and asset of last resort; gold is more often referred to as a currency than a commodity. However, the platinum
market now finds itself in an environment where fundamentals have fallen foul of sentiment, and it is in this gap between perception and reality that contrarian investors earn their return.
Today’s market is one of only a handful of periods in history when platinum has traded more cheaply than gold. Although history tells us that this inverse price relationship will not hold fast for long, it has already been sustained for far longer than can be justified.
Source: Bloomberg, WPIC Research, Date: May 31, 2018.
Fundamentals will eventually reassert themselves and investors — particularly those who have never entertained platinum as an investment asset — may do well to consider the benefits platinum may bring to their portfolios. A look back over the past 40 years shows platinum’s premium over gold was often led by recognition of its fundamentals: In the late 1990s, for example, after years of tracking gold, platinum prices rose six fold in the following 10 years. Note that the last time platinum was in favor and at current levels (2006 and 2009) it nearly doubled in each of the two ensuing years.
Although currently trading at a discount of ~$400/ounce to gold, platinum is 30 times rarer than its yellow counterpart. While platinum can be considered more precious than gold, its industrial usage is vast: from use in computer hard drives to the treatment of cancer and refining of petroleum. These applications will uphold
platinum demand, and yet the supply side of the story is edging in the opposite direction, building a compelling case in support of platinum prices over the long term.
Put simply, there is not actually very much platinum in the world. South Africa is responsible for 80% of the metal’s production, but its output is forecast to decline on account of cost pressures and falling investment by the mining sector. Thinking visually, all the platinum ever produced would only cover your ankles in one Olympic-sized swimming pool, while all the gold ever produced would fill three such swimming pools.
By virtue of tight supply, in the past 40 years, platinum has been more expensive than gold for more than 80% of the time.
WHY PLATINUM LOST ITS PREMIUM
The decline in platinum’s premium over gold can be partly attributed to increased demand for gold-containing indices. Since 2014, a massive move in global assets from active to passive funds meant a resulting increased ownership of commodity indices. At the time, these commodity indices happened to include gold and not platinum (due to market size). This surge in demand bolstered the price of gold while platinum did not benefit. The accepted explanation was that platinum was seeing poor fundamentals, but this is incorrect.
Platinum Premium / Discount to Gold, Source: Bloomberg, WPIC Research, Date: May 31, 2018.
Over the medium term, the outlook for platinum supply/demand remains appealing, with deficits more likely than surpluses. Globally, platinum supply is forecast to fall 1% in 2018 (compared with last year), while demand is likely to be up, as gains in industrial and jewelry demand offset declines from the automotive industry and investment demand.
The jewelry sector accounts for 38% of platinum demand, and this is projected to rise 3% this year. Platinum is closely tied to emerging markets’ growth stories with rising middle classes representing a vast and fast-growing new consumer base. For example, in India platinum jewelry demand is forecast to rise 20% this year, and in China the growth of second- and third-tier cities is expected to trigger platinum demand growth that is likely to last into the long term.
AUTOS: THE FAMILIAR ‘ELEPHANT’ IN THE ROOM
Accounting for 41% of platinum demand, the car industry — and its tribulations — has weighed heavily on platinum prices in recent years. Although investor sentiment has yet to recover from the emissions scandal of 2015 and ongoing anti-diesel sentiment, platinum’s usage within the industry has, indeed, begun to move on.
While demand from the diesel car industry has declined, other auto sectors are picking up some of the slack. For example, as the market for electric-powered cars gathers pace, fuel cells, which use platinum, look more likely to be a part of the future electric car fleet and an exciting new source of demand growth.
Platinum is clearly undervalued relative to its past, to its production cost, and to gold. Contagion from the diesel scandal and distortions arising from trends in passive investing have triggered the kind of disconnect between fundamentals and price that investment opportunities are made of. Although past performance is by no means an indicator of future performance, it is worth noting that when platinum’s fundamentals are the dominant driver of its price, two to six fold price increases have resulted as well as a healthy premium to gold.
Editor’s Note: Trevor Raymond will be hosting the World Platinum Investment Council breakfast session at this year’s Sprott Natural Resource Symposium in Vancouver, Canada.
Trevor is a precious metals specialist with over 30 years’ experience in the equity and metals market. He moved into the platinum industry in 2000 following 17 years in gold mining, which saw him undertake roles in engineering, mineral economics and corporate finance.
Attend the session to gain further insight into the outlook for platinum and speak with the Director of Research of the WPIC.
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