The current bull market has not been kind to precious metals like platinum. Since hitting a high of $1,976.70 in August 2011, platinum prices have been halved to the current spot price of $981.60. While platinum is trading at a six-year low, below its 200-day and 50-day moving averages, and trading hands for less than gold, the worst may not be over.
Platinum has generally been out of reach to the average investor. That’s because platinum is approximately 15-20 times scarcer than gold. In fact, since 1970, platinum has commanded a 30% premium over gold.
Between 2000 and 2008, platinum traded over 1.8 times the price of gold. But today, platinum is trading at $981.00 per ounce while gold is at $1,110 per ounce. The drop in the price of platinum is also reflected in the share prices of platinum miners.
Chart courtesy of www.StockCharts.com
Why the reversal of fortune? Platinum prices have tanked because of weak global demand from investors and industrial use. A weak economy means weak platinum prices.
Where gold has little use outside of being an investment tool (and luxury item), platinum is the most diverse precious metal with half of annual production allotted for industrial use. Luxury items account for 40% of demand while investors account for just 10% of annual production.
A September 8th report from the World Platinum Investment Council (WPIC) gives investors some insight into where platinum prices are headed. The WPIC was launched last November to encourage platinum as an investment among financial institutions, wealthy individuals, and retail investors. Through its quarterly reports, the WPIC also hopes to provide market insight. (Source: platinuminvestment.com, September 8, 2015.)
What did investors learn from the report? The global platinum supply is expected to grow nine percent to 7.9 million ounces in 2015. Thanks in large part to a recovery in South African mine output from the 2014 strikes. In the second quarter of this year, the WPIC said platinum production was 17.5% higher than in 2014. Demand, on the other hand, is expected to rise by just four percent.
The supply/demand metric is clearly being played out in the depressed price of both physical platinum and share price of platinum producers.
Platinum as a New Reserve Asset?
In an effort to shore up demand and the price for platinum, mining companies, labour, and the South African government have been working to save jobs. South Africa accounts for 70% of all platinum production; followed by Russia (15%), Zimbabwe (7%), and Canada (4%).
Their solution? To explore the possibility of getting platinum used as a reserve asset by central banks, especially amongst the BRICS countries (Brazil, Russia, India, China, and South Africa). Because of the scarcity of platinum, central banks, they claim, would only need to hold one percent of their assets in platinum to positively impact its price.
Using central banks to artificially prop up platinum prices to maintain job security probably isn’t a good idea. For starters, central banks would be asked to top up on platinum every time the industry slumped. Not the best investment.
Industry Restructuring Not a Great Sign for Platinum
On Wednesday, September 9th, mining giant Anglo American Platinum Ltd. sold a huge portion of its South African platinum business to Sibanye Gold (the country’s largest gold producer) for a minimum of 4.5 billion rand ($330 million). (Source: wsj.com, September 9, 2015.)
The sale was seen as an effort to restructure and sell high-cost operations. But how could it be seen as anything but a bad omen for platinum?
On top of that, a number of South African platinum producers have been trimming staff or shutting down altogether. Glencore Plc said it will close its Eland platinum mine. Eland is one of two platinum operations owned by Glencore in South Africa. The two mines produce about 157,000 ounces per year. Or rather, did. Lomin, the third-largest platinum miner said in July that it will reduce its annual output by 100,000 ounces and eliminate up to 6,000 jobs. (Source: Bloomberg.com, August 18, 2015.)
Meanwhile, Stillwater Mining said it will lay off 119 workers or about seven percent of its workforce. This, too, will take a big portion of platinum off the market. Each year, Stillwater Mining produces around 120,000 ounces of platinum and 390,000 ounces of palladium. (Source: Stillwatermining.com, August 17, 2015.)
Less is Not More for Platinum…Yet
While some may suppose that because platinum miners are laying off staff and cutting back on production, platinum will become scarcer and prices will climb higher. But it won’t.
Platinum mine production may not be able to meet demand, but the current above-ground supply remains abundant thanks to increased jewellery recycling. On top of that, strong growth in the recycling of catalytic converters from cars is adding low-cost supply to the market.
Investors may see the depressed price of platinum as a great entry point. And it may very well be. But chances are good platinum prices have not bottomed.