Platinum: is it losing its premium to gold?

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Platinum is the principal metal of the six metal groups (palladium, rhodium, ruthenium, osmium, and iridium) that bears its name which all possess unique chemical and physical qualities that make them vital

industrial metals. While comparing the other precious metals, mostly with Gold, platinum always remained at a premium over a decade which now seems to be wiped off. Prices are converging for the first time since the global economy was in recession in 2008 as investors seek a haven from slumping stock markets and slowing growth. The “Parabolic” rise in Platinum prices took a sharp correction of 65% during the recessionary period of 2008-10. The hike in prices was well braced by a continued “Excess demand” which topped by 2050 thousand ounce in 2008.
Supplies of platinum are concentrated in South Africa, which accounts for approximately 80% of supply; Russia, 11%; and North America, 6%. Because of the metal’s importance as an industrial material, its relatively low production, and concentration among a few suppliers, prices can be volatile. For this reason, it is often considered attractive to investors. Gold began soaring to new highs as the fears of another crisis, this time rooted in Europe, transferred to the US. And then, particularly after the S&P downgraded US long term debt, gold narrowed the gap with platinum and

even went past it. Platinum is down by 0.65% for the year till date while gold rose 22%. Investors in exchange traded funds hold $125 billion of gold which is 52 times more than in platinum. The ratio is therefore indicating that the market is still concerned about a global recession. When prices converged in 2008, platinum more than doubled in the following 16 months, outpacing gold’s 38% advance, as economic growth rebounded. Consumers bought 36% more platinum jewelry in 2009 than a year earlier, the most since at least 1975 YOY basis.

DEMAND SUPPLY
Year Platinum(‘000 Oz) Gold(Tons) Platinum(‘000 Oz) Gold(Tons)*
2005 7230 4266 6490 2549
2006 7965 3982 6640 2483
2007 7890 4127 6830 2474
2008 8270 4081 6600 2409
2009 7990 4347 5940 2590
2010 6795 4374 6025 2682
2011 7880 1196 6060 664**

*Only Mine production is taken as gold supply **2011 Q1 gold supply is shown

According to the WGC estimate, 58% of platinum is used in industry as compared to 12% for gold. So, a slowing economic growth can hurt platinum more than gold. Fear drives gold and at the moment there’s a lot of fear. Gold is far more of an investment metal, a speculative metal and a safe haven. Central banks buy it as a store of value and it’s a proxy currency. Platinum aren’t any of those things. Moreover, as stated by Fed that there exist significant downside risk for the economy, gold may be demanded as haven. Also, going ahead, Chinese New Year demand and Asian festive

season demand may drive gold prices to surpass platinum. Platinum/ Gold Ratio The ratio entails how many ounces of gold it takes to buy one ounce of platinum. Obviously gold was under valued as compared to platinum till 2008 when it reaches above 5. But from there on, the ratio fell below 2, meaning, gold is getting more precious than platinum. As discussed above, due to gold’s more bullishness, this ratio is also expected to test its lowest in coming days.
Long term bullishness still hold good for gold because of the following reasons:

    • Announcement by the Swiss National Bank on 6th Sep that that it will no longer tolerate a Euro-Franc exchange rate below 1.20. So, they were planning to buy Euros with Swiss Francs. The action effectively removed the Swiss Franc as a convenient alternative to gold

 

    • Secondly, announcement by five major central banks namely; FED, ECB, SNB, BOJ and BOE, to provide dollar liquidity for a number of European banks that suffer from exposure to Greek banks

 

    • Thirdly, most of the developed and developing countries are now bearing the “Negative real rate of interest” which is another bullish factor for gold. Regardless of whether we believe the CPI numbers, anyone with money in the bank or holding short term treasury notes, is losing money to price inflation

 

    • In just the first half of this year, official sector purchases are up three-fold over the 2010 total to 216 tons, which is largely due to low sales levels from Central Bank Gold Agreement (CBGA) signatories and the International Monetary Fund (IMF) completing its sales program at the end of 2010. In addition, other countries have gobbled up gold in an effort to diversify reserves away from the U.S. dollar

 

    • Chinese exports and jewelry sales are rising along with the Chinese lunar new year ahead in the month of January and the Indian festive season ahead is likely to boost the demand for gold

 

  • Continued negative real rate of interest and Fed’s continuation of a prolonged ultra low interest rate is likely to keep the metal high

Central banks, particularly in the emerging nations, have been aggressively increasing their gold holdings as a proxy to currency devaluation while Platinum, not known to be held by any central banks. So, Platinum may be slacking as global industrial and manufacturing sector continues to be weak and thereby hampering the industrial demand part of the metal. Hence, there is possibility that the yellow metal will be fetching more premium than platinum in recent time ahead.

Oct 2011

Source : Bullion Bulletin

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