If there is one commodity that has disappointed investors more than any other over the past five years, it is almost certainly platinum.
Most of the others had their moment in the sun, however brief, but the platinum was miserable.
His day will come. The question is: when?
Three good reasons why platinum is cheaper than gold right now
We tend to think of platinum as more expensive than gold – this is why platinum credit cards have a higher status than gold and why in the world of album certification platinum ( one million units sold) ranks higher than gold (half a million units).
Historically, platinum has been the most expensive, which makes sense since it is rarer. Typically, the price of platinum will be 1.25 times that of gold.
With gold hovering around $ 1,800 an ounce, then you would expect the price of platinum to be trading around $ 2,250 an ounce.
This is not the case, however; it doesn’t even trade at half of it. it doesn’t even trade at $ 1,000 an ounce – it’s $ 980. On its current trajectory, platinum will be half the price of gold at some point in the next fortnight. Just 15 years ago, it was double the price of gold.
Why the disappointing performance? There are three reasons, as far as I know.
There are three main sources of demand for platinum in the world: cars – platinum is used in catalytic converters to oxidize carbon monoxide in diesel engines; investment – people buy platinum for the same reasons as gold and silver; and jewelry.
Since the Volkswagen diesel scandal of late 2015 – when it emerged that diesel engines weren’t as clean as claimed – demand for diesel cars has plummeted. Unfavorable taxation has only amplified this phenomenon.
Meanwhile, many investors who in the 2000s could have bought platinum are now buying bitcoin. Anti-inflation speculative trading has switched to crypto.
And, when it comes to jewelry, platinum isn’t as trendy as it was a decade ago – probably because it’s worth less today and jewelry is a status symbol.
Platinum supply is highly centralized: more than 70% of the annual global supply comes from one region of South Africa – the Bushveld. With a central point of failure, the market is extremely vulnerable. If anything big were to go wrong there – strikes, blackouts, natural disaster, political disruption – the platinum market would be in big trouble. And platinum owners will kiss like bandits.
But for now, things are going well. As the World Platinum Investment Council indicates this week in its quarterly report, the supply of platinum mines “continues to gradually recover from operational disruptions linked to Covid-19” and is up 13% this quarter from a year over year. For 2021, the total mining supply is expected to be up 25% compared to last year.
Recycling is another important source of supply and which fell 9%, but even so the total supply is up over 7% this quarter.
Meanwhile, due to the semiconductor chip shortage, automotive manufacturing has not grown as much as initially expected – up just 3% in 2020 – and this has also affected demand for platinum.
However, tighter emissions laws mean platinum loads in catalytic converters are increasing. With the high price of palladium, some substitution began to occur with platinum instead of palladium being used in other types of engines.
Demand for vehicles is expected to increase next year which should be good for platinum, although the price of palladium has dropped significantly, so we will likely see less substitution.
Platinum is not uncommon – but it could be if green hydrogen takes off
As for investment, demand for bullion and coins is on the rise, but flows to exchange traded funds (ETFs) are declining. Many are deploying ETFs in dividend-paying miners, and many are heading into the considerably more racy crypto markets. However, demand for coins and bullion is expected to remain.
As for jewelry, the Chinese currently prefer gold, and they are the big buyers. It’s fashion, so it can (and will) change – but it’s the current trend.
For years, platinum was in deficit. Annual demand was greater than supply, which pushed up prices. Now there is a surplus and so it is difficult to get excited about this market. It won’t last forever.
The light at the end of the tunnel for platinum investors is green hydrogen; this seems to be the best route to decarbonization. Platinum is used in water electrolysers to produce green hydrogen, as well as in hydrogen fuel cells, which can power fuel cell electric vehicles. Platinum is essential for releasing hydrogen and will therefore be essential for achieving the global net zero goals.
This is well known, however, and currently the market is going, “meh”. It could mean that green hydrogen is too many years away for the market to care, or the market doesn’t believe politicians to be net zero, or, quite simply, the market got it wrong. Or a bit of all three.
But overall, it now looks like the platinum slump will continue. Until they don’t. And then it will all seem very obvious that everyone should have platinum in their wallet, much like we found out with uranium earlier this year.
Buy when the market is boring and nobody cares, it’s often a time to buy, then wait, then rejoice.
Over the past year, platinum has hovered between $ 850 and $ 1,350. We are currently at $ 980 and in a downtrend. If you can get it back below $ 900, I don’t see how that goes wrong as a long term investment – but, like I said, you might have to wait awhile.
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