Here's a fact about precious metals that no one is paying attention to: Platinum metal, its stocks and its ETF will outperform gold. Yes, we all know all the attention that gold is getting due to the global currency printing presses and serious concerns of inflation. But the best you can do with gold is wear it or store it. Not with platinum. Platinum has other important "industrial" uses that add to its investment appeal
Platinum is more rare than gold, more expensive than gold, has more practical uses, is in much tighter supplies, and is only mined in a few areas around the world.
Platinum and its related metals such as palladium, iridium, rhodium, osmium and ruthenium are part of the precious metals group called platinum group metals or PGM. They have similar chemical and physical properties and are found at the same ore deposits around the globe. For simplicity, I'm focusing on platinum but the same opportunities apply to platinum's sister metal, palladium.
Why get excited about platinum? Well, the supply and demand dynamics are both attractive.
Platinum Prices Will Continue Up
With the global recession, the price of platinum tanked by 66% to $774 an ounce from early 2008 highs of $2,250/ounce. It is still 40% off its high and the fundamentals are more compelling today than a few years ago.
My price target is more than $1,900/ounce in a few (2-4) years.
Let's look at why... On the demand side of the equation, there are at least three compelling reasons to be excited about platinum's outlook.
- Global Vehicle Volumes Rising. The biggest use of platinum is in motor vehicles. Actually, 50% of newly mined platinum usage is for global vehicle demand. Platinum is used in catalytic converters, which is part of a vehicle's exhaust system and is critical in reducing carbon monoxide, nitrous oxide and hydrocarbons in the atmosphere. The platinum in the catalytic converter absorbs and converts these deadly emissions into harmless ones.
Every traditional internal combustion engine has a catalytic converter and new vehicles being manufactured have even tougher emission regulations, requiring more platinum content.
Vehicle demand tanked during this recent recession and platinum prices followed suit. Now we're witnessing a turnaround in global vehicle sales.
And China, which recently beat the U.S. to be the largest car market, is growing rapidly. Tax incentives, credits and new financing methods all support fast Chinese vehicle demand. According to CMS Insight, an automotive consultancy, total global light vehicle sales will jump by 30% over the next two years and grow much more than that in China. Even better, China's commercial (e.g. truck) demand grew by 45% last year and should continue at that level.
Overall increased global concern about the environment and emissions means increased penetration of platinum as more manufacturers and refineries adopt their products and technologies. This is particularly true in emerging markets such as China where pollution and smog is a serious problem.
- Jewels and Gems. Platinum is commonly used in jewelry given its rarity, durability and polish--to name a few appealing attributes. About 20% of platinum's end use is in jewelry.
The cultural importance of jewelry cannot be underestimated with regards to China and India. As millions of Chinese and Indians move into the middle class, their desire and ability to own jewelry increases substantially.
One hundred million young Chinese and Indian women love their jewelry. My last trip to Asia included a stop in the Chinese island of Macau, the Las Vegas of the East. I couldn't believe all of the jewelry stores near the casinos. If someone hit the jackpot, they were very likely going to take some of their earnings and buy jewelry.
China and India represent about 8-9% of the global gem and jewelry sales, or roughly $5 billion--and have the fastest growth rates. The total market should grow at over 5% for the next few years and will be a $250 billion market by 2015 compared to $146 billion in 2005.
- Platinum Group Metals ETF Demand. This past January, two exchange-traded funds (ETF) were launched, one for platinum bullion and one for palladium bullion. Since these ETFs are backed by the actual bullion, as investors buy the ETFs fund managers have to make more physical purchases. It is almost like a self-fulfilling or self-promotional process. The more investors buy into the ETF, the more the ETF has to buy physical bullion, thus providing some distinct price support.
Actually, given the limited supply of platinum, the exchange-traded fund has affected supply and demand characteristics by taking increasing amounts of the metal off the market.
The Wall Street Journal states that there are only 2.2 million ounces of open contracts of platinum (compared to 47 million in gold). And already close to 15% of platinum bullion surplus has been picked up by the ETF. Even better, another precious metal ETF is expected later this year--increasing exposure to investors and putting more upward pressure on the platinum prices.
As if the demand part of the equation weren't compelling enough to make you want platinum exposure, let me talk about some of the supply issues.
- Russian Stockpile Depleted. South Africa (Bushveld Complex) and Russia represent over 90% of all production supplies as there are very few ore deposits around the world. Most are in South Africa, then in Siberia. There are also mines in Montana (Stillwater and East Boulder mines) and in Ontario, Canada.
And Russia (25% of total supplies) has the only surplus supply. As a strategic and national security move years ago, Russia accumulated excess platinum surplus.
These Russian stockpiles had created a mild supply overhang for platinum. The Russian government had been slowly unwinding and reducing this supply surplus. The key point is that industry experts believe Russia is running out of its surplus. If ever confirmed that would be quite a bullish indicator. As opposed to gold, the total amount of platinum ever mined could fit into your living room--there is no Fort Knox.
- Production Issues. There have also been increased production disruptions, health and safety issues, strikes and other operational problems in South Africa platinum mines. These problems are worth keeping an eye on given the tight supplies available.
A few weeks ago, platinum producer Platinum Australia had to shut down all operations at its mine in Smokey Hills, South Africa. There have also been other disruptions such as worker strikes at other South African mines. This ongoing risk provides some upward price action.
Buy the ETF
What's the best way to invest in platinum? You should want direct exposure to platinum's bullion price and the favorable global trends.
You could own the U.S. and Canadian platinum companies such as
Stillwater Mining (SWC:NYSE) or
North American Platinum (PAL:NYSE).
But you wouldn't be getting the full global
benefits of global platinum demand,
since
a lot of production is regionally designated--i.e. to North American car manufacturers. There would be little direct benefit from the faster-growing demand from China.
Other miners are diversified and are mining for other metals besides platinum. Also, I'm leery of the liquidity and volume of the South African companies such as
Anooraq Resources (ANO:AMEX), which is trading under $2/share. And I worry about the direct operational risk of South African companies.
So, the best way to invest in platinum, in my opinion, is to actually buy the bullion ETF.
ETFS Physical Platinum Shares ETF (PPLT:NYSE),
which actually started trading in January, is the best way. It's only up mildly since then. Also consider the sister commodity ETF for palladium--
ETFS Physical Palladium Shares (PALL:NYSE).
With PPLT you can take advantage of the long-term global favorable outlook for the precious metal that should shine for the next several years. Not only to take advantage of very favorable global supply and demand fundamentals, but also as a solid hedge against future inflationary risks and fiscal uncertainty--just as gold does.
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Serving as the editor of Taipan’s Safe Haven Investor, and contributing editor to the free e-letter, Taipan Daily, Kent Lucas has over 20 years of financial and business experience centered around seven years as a research analyst and portfolio manager for a leading investment management firm. In that capacity, he actively managed $1 billion worth of equity assets, with particular attention to multi-industrial companies along with auto, construction and farm equipment-related companies.
In addition to his professional asset management experience, Kent also has worked in leading financial institutions’ divisions including Tax-exempt Derivatives, Corporate Trust and Equities Sales and Trading. With a BA in Economics from Harvard University and MBA from Stanford University, Kent brings a fundamentally driven, value-oriented approach going against the crowd to find solid companies at attractive prices.
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