Some of the toughest decisions an investor has to make occur when you are up on a trade. I’ve highlighted some of the merits in investing in precious metals like platinum before, the last being on January 11, 2012, in the article Investors—Should You Consider Platinum?
At the time I wrote the article, platinum was trading approximately $1,497; as of today, the market for platinum is trading around $1,723, a move of approximately 15% in less than seven weeks. In fact, the entire precious metals space has moved up sharply since I have been talking about this market. Indeed, the entire team at Profit Confidential has been making our readers aware of the potential for profits in the precious metals space for many years.
To understand where we’re going, let’s take a look at some fundamental news that has affected the price of platinum by looking at some mining stocks that extract precious metals. Impala Platinum Holdings Limited (Pink Sheets/IMPUY) is a South African miner of precious metals and produces approximately 25% of the global platinum supply. The firm was hit by a strike, which resulted in the dismissal of roughly 17,000 employees. As of February 14, 2012, the firm has lost 60,000 ounces of platinum production due to the strike stoppage. This strike reduces daily platinum output by roughly 3,000 ounces per day.
Mining stocks that have issues with supply in precious metals like platinum force the market to reduce existing stockpiles. This is a two-fold effect. The short-term demand drives up the price of platinum and, if the reduction in platinum production by mining stocks is due to a temporary problem, like a strike and not a structural issue such as a miscalculation in the amount of platinum reserves, then that is a long-term positive for platinum mining stocks. This assumes that demand for platinum remains constant. With more money supply by central bankers coming online, it can be safe to assume that precious metals prices like platinum should move higher, unless a dramatic slowdown in the world economies were to occur within the next few months.
Technically, when I suggested that platinum might be a good investment, the market was moving up off a large bottom following a decline over several months in late 2011. Once platinum broke above its 50-day moving average, you’ll notice it then touched that level and then moved up sharply. Platinum prices then moved, predictably, to the 200-day moving average. Usually when precious metals like platinum initially hit their 200-day moving average, they will bounce off, re-group and try to break that level.
We’ve just witnessed a definitive break above the 200-day moving average for platinum; the question is now: where? Obviously, no one can predict the future with certainty, only with probabilities. After such a huge move up from the December lows, we will be hitting significant resistance from the levels above in the range of $1,750-$1,800. Investors from last year who bought platinum near the highs will want to lighten some of their holdings, as they are now essentially flat after suffering from the decline in platinum prices during the fall. This does not mean the bull market is over, but a normal period of consolidation is due for the entire precious metals sector.
With the supply of platinum being reduced, more money is expected to flood into the monetary system worldwide. Combined with a key breakout technically in the charts, this all leads me to believe that the bull market in platinum and the precious metals space is for real. I would certainly not rush to buy platinum today. I would wait for a pullback and see what the big funds are going to do with their money. If we see consistent buyers of platinum and other precious metals on a pullback, I’ll be happy to ride the wave along with them.