Forget about bringing in a gold standard. Platinum could be the next monetary reserve for international business. At least, that’s the pitch from one industry group.
Last spring, the World Platinum Investment Council (WPIC) hinted it would consider adopting platinum as an international monetary reserve, working with the International Monetary Fund (IMF) and several governments around the world to that end. (Source: “WPIC seeks platinum reserve asset status,” Mineweb, May 27, 2015.) The WPIC is said to have discussed the idea of holdings of platinum reserves with governments of many countries across the world. If such a move happened, it could send platinum prices soaring.
Indeed, platinum is not an official reserve asset, but if one or more countries change their minds in response to the WPIC campaign, the white precious metal may soon become a state reserve asset, just like gold. However, the only thing that gold and platinum have in common is that they are precious metals; their roles as raw materials are very different.
Monetary reserves help countries keep a readily available asset in case of an emergency and these are closely controlled by the monetary authorities. In the United States’ case, the Federal Reserve fills this role. Monetary reserves can be used to meet the financing needs of the balance of payments or to intervene in foreign exchange markets to support the national exchange rate. Currently, currency reserves consist of gold and foreign currencies, such as the U.S. dollar.
Platinum’s problem is that it is more useful than gold. While gold has traditionally served as an investment metal and used mostly in jewelry, platinum is primarily an industrial metal, used in the automotive industry in spark plugs and in catalytic devices to filter exhaust fumes.
Gold is much more fluid than platinum and to central banks, whose main role includes buying and selling assets in accordance with political mandates, this characteristic is important. Should a bank suddenly decide to sell large amounts of platinum, it would have a disproportionately significant effect on the platinum market, because it is much smaller than the gold market. In other words, a government’s sale or purchase of platinum could cause prices to drop or increase sharply. Institutions seeking stability would not find this dynamic appealing.
Nevertheless, the WPIC has been pursuing the idea of including platinum in the “money supply.” While its ultimate goal will be difficult, at worst, it has shed more light on platinum investing.
For the time being, platinum prices vary according to their industrial demand. The Volkswagen AG (ADR) (OTC:VLKAY) emission scandal was bad news for platinum. The precious metal’s prices have dropped since the “Dieselgate” emissions scandal broke, dropping from $984.00 an ounce to $910.00. (Source: “Falling Price of Platinum: Volkswagen Cheating Scandal Latest Straw in Ongoing Decline,” International Business Times, October 3, 2015.)
Platinum prices could see an even steeper descent, according to some experts, who believe that it could fall below that of its poorer cousin, palladium. Palladium’s price has oscillated between $700.00 and $850.00 an ounce in the past year.
Why Would Volkswagen Have Anything to Do with Platinum?
Platinum is one of the key materials used in catalytic converters and diesel automobile engines. Some analysts have suggested that in the wake of the VW scandal, diesel vehicles will no longer be as popular as they have become over the past few decades, reducing the demand for catalytic converters. Currently, catalytic converters account for approximately 40% of global demand for platinum.
Consumers have become disillusioned about diesel claims, especially in Europe, where the use of this type of engine is very widespread and popular. The negative reaction to these types of vehicles could be very strong, meaning platinum could fall further, potentially hitting between $700.00 and $850.00 an ounce.
The one redeeming quality that platinum possesses is that its supply is frequently inconsistent due to the limited number of sources for this metal worldwide. Nevertheless, platinum has suffered the commodity malaise that has also affected gold; in fact, platinum prices have fallen, unusually and sharply, below gold.
Platinum may well have taken the hardest hit. To date, while gold is trading around $1,060 an ounce, platinum is trading at an unprecedented $875.00 per ounce. In September alone, in the wake of the VW scandal, platinum prices have dropped to a seven-year low. The prices of platinum and gold crossed paths in mid-January 2015, a phenomenon that was last seen in 2009, in the thick of the financial crisis. Since then, the gap has continued to increase. However, as recently as mid-2014, platinum was sitting at more than $1,500 an ounce.
Chart courtesy of www.StockCharts.com
Analysts believe that the current gap between the prices of gold and platinum is not going to last. Platinum and gold will not be sold at discount rates for much longer, according to Thomson Reuters.
Barclays suggests that plunging platinum prices could drive demand for platinum jewelry, which is especially appreciated in China. A research note from the bank reads, “Currently, platinum/gold is trading the lowest level in more than 25 years. Although the diesel-engine scandal has a limited direct effect on gold, the price ratio between platinum and gold can affect jewelry demand, shifting some from gold into platinum, especially in markets such as China, where there is a preference for platinum jewelry.” (Source: “Platinum price falls to seven-year low,” Mining.com, September 29, 2015.)
As for diesel engines, their efficiency and popularity, especially in Europe, may have suffered a temporary setback, but it has affected Volkswagen almost exclusively. Other manufacturers from Fiat-Chrysler to BMW, Mercedes-Benz, General Motors, Ford, and Peugeot are launching new models, all having diesel variants. Moreover, while engineers have various tools at their disposal to reduce nitrogen oxide (NOx) emissions, which were at the heart of the VW scandal, one of the most practical antidotes still involves platinum.
NOx traps, used on diesel engines to reduce emissions, are characterized by a substrate catalyst based on platinum, rhodium, and barium oxides. The catalyst is capable of capturing and converting nitrogen oxides into gases that are less harmful to the environment. (Source: “Global mobile emission catalyst market analysis and forecast to 2015 to 2021 shared in new research report,” WhaTech, November 11, 2015.)
Price collapse has been the common denominator of commodities from gold to crude oil. Even platinum has not been spared, dropping to decade-low levels. However, as Sir Isaac Newton proved, eventually, what rises must come down. Patience will reward those who can wait for the inevitable rebound in raw materials and the wait should not be much longer.