HardAssetsInvestor

Written by Julian Murdoch  |

October 18, 2009

Platinum: A Stronger Safe Haven Than Gold?

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Gold isn't the only precious metal shining lately. What's behind platinum's rise—and, more importantly, will it continue?

• Demand still recovering from 2008
• Oversupply in 2009 and 2010?
• How would a U.S. ETF affect the market?

 

Gold has scored a lot of press lately, and for good reason: Its price just keeps on making new records and breaking them. Just last week, the yellow metal recently struck a new all-time high of $1,072/oz.

But on a year-to-date basis, another precious metal has quietly outshone gold's returns: platinum.

As we've discussed before, platinum is both an industrial metal and an investment vehicle, used to make jewelry, construct automobile catalytic converters and as a safe haven for bullion investors. Last year, the white metal was still in hot demand: According to Platinum Today, in 2008, miners across the globe produced 185.7 metric tons of platinum, but consumers used 197.4 metric tons of the white metal—a deficit of 11.7 metric tons.

That deficit was a result of a supply-side shock. Power shortages in South Africa, where the majority of the world's platinum is mined, caused severe interruptions in mining operations. By early March of 2008, platinum had hit an all-time record of $2,301.50/oz., while gold hovered around $98/oz.

Of course, last October, both metals took a beating as a result of the financial crisis, and their prices had started to converge. Platinum was the harder hit, dropping 68 percent off its record to strike a five-year low of $744.25/oz. on Oct. 27, 2008. Gold fared slightly better, hitting its low of $705 a couple of weeks later.

Since then, both metals have managed to recover from their lows, as investors turn to precious metals for safe havens from the weakening dollar. But platinum in particular has taken off; since the beginning of the year, platinum's price has gained more than 50 percent, reaching a high of $1,367.90 last Tuesday:

 

 

But not all of platinum's outperformance can be traced back to safe-haven investing. As with most things in the commodity world, China has also influenced platinum's recovery.

 

Demand Recovers ... But Is It Enough?

In the first half of 2009, demand for platinum jewelry in China went up 81 percent year-over-year. That's a big deal: According to platinum company Lonmin, China accounts for over 60 percent of the world's total platinum jewelry demand.

Japan has also regained its appetite for platinum jewelry, with sales of new metal up 500 percent. Granted, that number is so large only because the starting point is so low; Japan recycles a lot of its old metal, so any increase in demand for new platinum inherently carries a big percentage increase.

What about demand from the automotive sector, which in 2008 accounted for 60 percent of all platinum usage? While it's still too early to argue that increased car production is actually supporting platinum, demand outside the U.S. has been slowly picking up. China, for example, sold 9.66 million new cars since the beginning of the year—1.33 million in September alone as a result of government incentives.

Still, even with these positive signs for demand, many analysts expect a surplus of platinum both for 2009 and 2010—although it doesn't seem to be affecting their price forecasts much. GFMS Ltd. expects a surplus in 2010 of over 11.3 metric tons, with prices in the $1,250 range. Lonmin disagrees, stating 2009 will only see a small surplus, with 2010 more balanced; they predict the market will swing back into deficit for 2011 and 2012.

For its part, Bank of America/Merrill Lynch Research takes the more conservative view, raising its price forecast from $1,250 to $1,350 for 2010 (perhaps the analysts figure increased investor demand will support prices into 2010).

Regardless of what analysts predict for the future, if you want to understand platinum right now—and where it could go next—you have to look at physical investments.

 

Physically Backed Platinum ETFs

Currently, the only ETF that holds physical platinum is ETF Securities' Physical Platinum (LON:PHPT), putting it in an ideal spot to take advantage of the investor rush to safe havens. During the first quarter of the year, investment inflows grew 82 percent from the previous quarter; as of Sept. 30, the fund held 360,790 troy ounces. During the past week alone, PHPT saw inflows of $29 million.

Rumors of a U.S. physical platinum ETF have been floating in the market for several years, but nothing has materialized—yet. As we reported back in April, ETF Securities filed with the SEC earlier this year to bring platinum and palladium ETFs to U.S. investors, but they've taken no public action on the paperwork since then.

The big question is: If a new ETF did open in the U.S., what effect could it have on demand and pricing, especially in a market as small as platinum's? Would it, as auto companies and industrial users suggest, siphon metals away from the market and therefore raise prices?

Let's run the numbers. Assuming GFMS is correct about the size of the platinum surplus we might see this year (11.3 metric tons), at today's platinum price of $1364.30/oz., a potential ETF would need to raise $4.96 billion to wipe the surplus out completely.

Considering that's just a bit bigger than PHPT is currently, it doesn't seem like much of a stretch to think a new U.S.-based ETF could easily become large enough to swallow up any excess platinum available in the market.

Of course, any new ETF wouldn't start off on day one that large. Besides, investors may be cautious about buying into the metal at the current price level, preferring to wait until a price drop comes.

But there is a distinct possibility that in such a small market, another ETF could become a force to be reckoned with.