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Published: September 30, 2010
Gold set another new
record last week, closing above $1,300 an ounce for the
second-straight day. The London Bullion Market Association - at
its annual conference this week - projected that the "yellow
metal" would advance to $1,450 in the next year.
With the U.S. Federal Reserve, the Bank of England (BOE) and the
Bank of Japan (BOJ) all having near-zero interest rates and
moving toward more "quantitative easing" - pumping money into
the global economy - the case for gold looks more convincing
than ever.
Yet there are other precious metals that stand to benefit from
the same inflation-hedging-related demand that's driving gold to
record after record.
One particular metal right now looks to be an even better
investment than gold. It is favored by Chinese investors and is
benefiting from soaring industrial demand. Unlike gold or
silver, this particular precious metal has risen only about +6%
this year, and remains well below its 2007 peak.
The metal I'm talking about is platinum.
Platinum's Promise
Platinum is extremely rare, occurring at only 0.003 parts per
billion (ppb) in the Earth's crust. This makes it the most
precious of all precious metals - about 30 times rarer than
gold. Annual platinum production is roughly 175 tons, equal to
6% of the annual production of gold. In fact, platinum is so
rare that if all the platinum in the world were poured into one
Olympic-size swimming pool, it would scarcely be deep enough to
cover your ankles. At the same time, unlike gold, platinum has
major industrial uses, most notably in automobile catalytic
converters.
Platinum is by far the best metallic
catalyst. Since the 1980s, this "noble metal" has been used in
catalytic converters, which oxidize toxic carbon monoxide into
carbon dioxide, and toxic hydrocarbon fractions to carbon
dioxide and water.
Its usage, therefore, is closely tied to automobile demand.
Platinum's principal competitor is palladium, which is cheaper,
but considerably less effective. So the pricing of the two
metals tends to move in parallel, with platinum being
three-times to four-times as expensive as palladium. This year,
however, palladium prices are up more than +35%, bringing the
platinum/palladium price ratio down to an exceptionally low
level around 2.5.
Needless to say, the principal market for automobile catalysts
today is China, whose automobile market last year leapfrogged
its U.S. counterpart to become the largest in the world, and
where sales in August were running about 18% ahead of its 2009
totals.
Although Chinese automobiles use less fuel than the larger U.S.
cars, they use just as much catalyst. In the last year or so,
Chinese manufacturers have tended to use palladium catalysts,
while Europe uses platinum. But rising global auto demand and
the two metals' recent convergence in price has made platinum
relatively more attractive.
Thus, platinum demand, driven by the worldwide automobile
industry - including a certain amount of the rapidly growing
Chinese and Indian auto sectors - can be expected to display
continued strength.
An additional attraction of platinum is strong demand from
investors in China. To the extent that they're permitted to buy
them, that country's investors are keen on precious metals in
general. In the case of platinum, demand takes the form of
platinum jewelry, whose sales in China rose from a 2008 level of
1.06 million ounces to a 2009 all-time record of 2.08 million
ounces - an amount equal to about 35% of the world's platinum
mine output of 5.9 million ounces.
Since annual catalyst demand is estimated to run at 50% of world
platinum output, it's easy to see the potential for a
supply/demand imbalance and a jump in platinum prices.
The Search for Suppliers
More than 80% of the world's platinum is mined from South Africa
and Zimbabwe, neither of them known for efficient mining
techniques or secure property rights. Another 10% comes from
Russia (enough said!).
That makes investment in a platinum mine rather unattractive.
There is one decent-sized North American mining company in the
field, Stillwater Mining Co. (NYSE: SWC), which mines
both platinum and palladium in Montana. But Stillwater shares
are currently trading at about 67 times earnings - scarcity
value will do that!
Indeed, analysts at the London Bullion Market conference just
predicted that platinum prices would advance 15% next year, but
those conferees are often overly cautious (last year, for
instance, they predicted that gold prices would be at only
$1,182 today). So this precious metal should provide investors
with a handsome return in the New Year.
Action to Take: Given the risk facing overseas platinum miners
and the stratospheric valuations of North American platinum
miner Stillwater Mining Co. (NYSE: SWC), it's clear that
the best route into platinum is the metal itself. That means
it's time to look at an exchange-traded fund (ETF) - the ETFs
Physical Platinum Shares (NYSE: PPLT).
PPLT has only been around since January, but it has a relatively
low 0.60% expense ratio. In June, the size of PPLT exceeded its
authorized maximum of 4.78 million shares (about $750 million at
current prices), so it's already large enough to be plenty
liquid.
-- Martin Hutchinson
Contributing Editor
Money Morning
Note: This article originally appeared on
Money Morning |
