There’s no polite way to spin it; precious metals have been getting hammered. And none more so than platinum. Platinum is roughly 15-20 times scarcer than gold and has always sold for more than gold. Since 1970, platinum has, on average, commanded a 30% premium over gold. Between 2000 and 2008, platinum traded over 1.8 times the price of gold. Not anymore. Gold is trading at around $1,100 an ounce while platinum has lunged down to around $980.00 an ounce.
For now, it looks like platinum may be the poor man’s gold.
Despite platinum’s versatility and necessity, the general consensus for platinum prices in 2016 continues to look bleak. But there are a large number of catalysts that could prove the platinum and precious metal naysayers wrong in 2016 and 2017.
Platinum Price Forecast 2016
If you make room in your retirement portfolio for precious metals, the current price environment either has you excited or mystified. You’d be mystified because platinum, silver, and gold are used as a physical asset to hedge against economic uncertainty. And despite the deplorable global economy, prices are decidedly down for all three metals.
Or maybe you’re excited because the seemingly irrational low prices have put platinum in an attractive range—a very attractive range. In fact, platinum has fallen below $1,000 an ounce for the first time in six and a half years.
Currently at $982.00 a troy ounce, platinum prices have fallen 18.5% since the beginning of the year. Going further back, platinum prices are down roughly 35% since last summer. The slump in platinum prices is a continuation from June 2014 after thousands of South African platinum mines returned to work after a five-month strike for higher wages.
Platinum prices have failed to recover from the unprecedented strike last year. Platinum is also facing head winds from narrow margins and rising costs from wages and electricity tarrifs.
Platinum prices have also been hit by weak demand for jewellery from China, a gloomy outlook for the Chinese and European auto markets, and fears of oversupply. Taken together and looking at where platinum is currently trading, UBS’s 2015 price forecast for platinum of $1,160 seems quite bullish. The banks’ platinum forecast for 2016 looks a little more upbeat at $1,280 per ounce. (Source: Kitco.com, July 28, 2015.)
Platinum’s Versatility and Necessity
Despite platinum’s poor performance over the last year, platinum continues to be a versatile and necessary product that will remain entrenched in our daily lives. And despite the downgrades, platinum will recover from its current levels and continue to do well in the medium to long turn.
Each year, around 130 tons of platinum is mined from around the world. This is equivalent to just six percent (by weight) of the total annual gold production in the western world. It’s also less than one percent of the annual silver mine production.
The vast majority of platinum is mined in South Africa (80%) and Russia (10%), followed by Canada at around four percent.
Gold has little real-life application other than as investment and for use in luxury items like jewellery. Platinum, on the other hand, is one of the most diverse popular precious metals. Approximately half of the annual production of platinum is snapped up for industrial use.
Platinum and other platinum group metals (ruthenium, rhodium, palladium, osmium, and iridium) are found in catalytic converters and fuel cells, hard disks, anti-cancer drugs, fiber-optic cables, LCD screens, fertilizers, paints, petroleum, glass, and electronic components. Jewellery and watches account for roughly 40% of all platinum demand, while investors commandeer 10% of annual production.
This is Why Platinum Prices are Depressed
As an industrial metal, investors need to actually see economic growth before the price of platinum will rebound. Unfortunately, economic woes in China, Japan, the eurozone, and the rest of the world make it pretty difficult to be outright bullish on platinum.
When it comes to platinum prices, we’re probably not at the bottom yet. But again, 2016 looks bright for platinum.
The International Monetary Fund expects global growth to be uneven, with the global economy expanding at just 3.3% this year. In 2016, growth is expected to strengthen to 3.8%. (Source: imf.org, last accessed July 28, 2015.)
The IMF believes that the underlying drivers for economic growth and investment in the U.S (wage growth, labor market conditions, low oil prices, strengthening housing market, and easy financial conditions) remain intact.
In the short term though, as a precious metal, platinum is being taken down by investors fleeing silver and gold.
Platinum as a Hedge Against Economic Uncertainty
The slow-and-steady economic growth trajectory doesn’t mean platinum couldn’t experience an unexpected pop. Like silver and gold, platinum is a physical asset that many investors use to hedge economic uncertainty. And there is a lot of uncertainty out there right now.
The stock market is one of the most uncertain things out there right now. The broader stock market continues to do well, but it’s being supported by ultra-low interest rates and cheap money. Fixed income investments are a bust, but getting money to dump into the stock market isn’t hard to come by.
You can only manipulate the stock market for so long. I enter the Chinese stock market as evidence of failed governmental intervention. East or west, eventually earnings and revenue will start to matter.
Right now they don’t seem to. While the S&P 500 continues to trade near record highs, it falls a little on the slightest bit of bad news and rebounds just as quickly. It’s been trading in a tight range since the beginning of the year and investors seem content with the status quo.
In the first quarter, the U.S. economy contracted 0.2%. In the second quarter, S&P 500 companies are expected to experience a 4.5% year-over-year decline in earnings; the first decline in more than two years and the biggest decline since 2009. Granted, it’s pretty hard to top the declines of 2009. Still, the S&P 500 does not exactly reflect a distressed market. In fact, investors continue to reward many companies by keeping their share prices at loft levels. (Source: factset.com, July 28, 2015.)
The markets are indeed lofty. According to the Case Shiller CAPE PE Ratio, the S&P 500 is overvalued by around 63%. The last times the ratio were this high was in 1929 and 1999. (Source: Yale.edu, last accessed July 28, 2015.)
According to the Market Cap to GDP ratio, U.S. stocks are overvalued by 26%. The Market Cap to GDP Ratio compares the total price of all publicly traded companies to gross domestic product (GDP). A reading of 100% suggests U.S. stocks are fairly valued. A reading above 100% suggests the stock market is overvalued. Conversely, a reading below 100% suggests it is undervalued. Based on the historical ratio of total market cap over GDP, the stock market currently sits at 126.6%.
The ratio has only been higher once since 1950—that was in 1999 when it was frothing at 153.6%. It was only at 108% before the housing bubble burst in 2008.
The point is; the broader stock market will eventually experience a sustained correction. One that will send investors back into silver, gold, and platinum.
Investing in Platinum
There are a number of ways to invest in platinum. You can own physical platinum by buying platinum coins. Because platinum is historically expensive, you can buy platinum bullion coins or wafers for as little as $100.00.
Another common approach is to buy collectible platinum coins. But because they possess a numismatic value, will be more expensive. For example, you can purchase a one-ounce platinum coin from the U.S. mint with a face value of $100.00 for $1,350. Or you can purchase a one-ounce platinum bar for around $1,000.
Those interested in non-physical platinum investments can look at platinum mining stocks and mutual funds. Whether you’re bearish or bullish on platinum, you can bet on platinum’s long-term trajectory through exchange traded funds (ETFs). Advanced traders can also look at platinum options and futures.
Platinum Price Forecast
Again, it’s tough to be a short-term bull when it comes to platinum. But the foundations for long-term appreciation are in place.
Right now though, platinum prices are not following historic trends. Platinum may be more rare than gold but it isn’t playing out that way right now. As it stands, platinum is the poor man’s gold.
It could become more reasonably priced. Again, trading near $908.00 an ounce, platinum is at a six-year low. But it has also fallen below its 50-day and 200-day moving averages and has no real tested support until the $800.00 an ounce level.
Before buying low and selling high in 2016 and 2017, platinum bugs may want to wait it out a bit.