Platinum vs Gold: Why platinum is more pricey & central banks only love gold

Gold began soaring to new highs as the fears of another crisis, this time rooted in Europe, gripped the West. Over the past few weeks, and particularly after S&P downgraded US long-term debt, gold narrowed its gap with platinum, and even went past it.This is not the first time gold has topped platinum, a metal 30 times rarer than gold, since the beginning 1990. In the first half of that decade the gap between the two precious metals was less than 10%, and gold traded above platinum on many days. Again during the crisis of 2008, the gap between gold and platinum narrowed, and that was mostly due to the crash of platinum.So why is Gold Rising Again?Central banks in emerging nations have been buying more of the metal to diversify their reserves. Most central banks hold their reserves in currency, and mostly in dollars. While many have diversified to increase their holding of other currencies such as the euro, economic troubles have meant the value of the currency holdings has depreciated vis-a-vis the domestic currency. In comparison, gold has been rising, and central banks holding big quantities of the metal managed to protect themselves from losses due to erosion of reserve currencies.Likewise, investors including pension funds and high networth individuals too have been diversifying their portfolio, pushing up demand for gold bars and exchange traded funds (ETFs). Gold is considered a safe-haven investment, and this explains the rush to accumulate it.Interestingly, elevated prices of gold have not dampened demand for the metal in India or China, the two largest consumers. Rather, the World Gold Council (WGC) reports that consumers in these two countries have got smarter and have stepped up purchases of bars and coins in the second quarter of 2011. For instance, Indians bought 108.5 tonnes as bar and coin in April-June 2011 compared with just 61 tonnes in the same quarter last year. At the same time, purchases of gold jewellery continue to grow. Similar trends were seen in China too.Gold vs Platinum PricesThe global economy has been in much turmoil since 2008, and that is the primary cause for gold to trend upwards, and more steeply than platinum. For instance, gold gained 129% between January 1, 2008 and August 23. Between July 1, 2011, when the US government was trying to convince Congress to raise the debt ceiling, and August 23, it rose $423 per ounce or 28%.The metal retreated from $1,911 per ounce reached in August 23 due to profit taking on expectations of announcement of another quantitative easing package by the Federal Reserve at the meeting. Strong economic data from the US also took some sheen off gold. However, when Fed chairman Ben Bernanke put off easing till September, gold climbed again.Platinum in contrast has risen steadily after the crash of 2008. Platinum is seen as an industrial metal more than a precious one, and its price has direct correlation with economic expansion. Most of its demand comes from auto-catalyst makers. Therefore when consumer confidence is positive and they are buying new cars, demand for platinum will be strong.

The metal had crashed from a high of $2,250 per ounce in March 2008 to $777 in November 2008, losing 65% as economies in the West began to contract after the onset of the financial crisis of 2008. The metal has recovered most of the losses it suffered, rising about 130% from the lows it hit, but it trades way below the peak.Reserves & Annual SupplyThe annual supply of platinum is only about 130 tonnes, which is equivalent to 6% (by weight) of the total western world's annual mine production of gold and less than 1% of silver's yearly mine production. It takes approximately 10 tonnes of ore and six months of mining to produce one ounce of platinum.

About 80% of platinum mine production comes from South Africa, 10% from CIS countries and balance 10% from the rest of the world. Any turmoil, political or labour, in South Africa can therefore affect supply and prices. It is also said South Africa has 88% of the world's platinum reserves, and some estimate it may be more valuable than all the crude reserves of the Arab nations.

 Gold is far more abundant, some 1,66,600 tonnes have been mined since the beginning of civilisation, according to WGC. Most of this gold is privately held, mostly by people in countries such as India. It is estimated 50,000 tonnes is still below ground. Annual mine supply of gold in 2010 was an estimated 2,590 tonnes while total supply, including recycled gold, was 4,162 tonnes.China is the top gold-producing country, with an annual output of 320 tonnes, followed by Australia and South Africa with 210 tonnes each. The US and Russia produce about 205 tonnes each annually.

Platinum is seen more as an industrial metal than a precious metal. This is because most of the platinum is used in industrial processes and just about 31% in 2010 (and likewise in most previous years) was used for jewellery. The automobile industry is the single largest consumer of platinum (39%), the metal is used in catalytic converters to convert poisonous gases into safer emissions.Platinum Guild say, the silvery metal is also used in pacemakers because it is not affected by the oxidising reaction of blood. Some 50,000 people have pacemakers that have platinum in them.

That said, platinum is the preferred metal for the world's premium jewellers, such as Cartier and Faberge, given its pliability that allows creation of intricate pieces. Incidentally, Japanese account for 95% of the platinum jewellery demand.Gold has traditionally been used for jewellery (50%) and investment (38%). The metal is also used in electronics and other industrial sectors. Soaring prices of gold have meant its demand for dental uses has been gradually declined. Very recently, given the shortage of platinum, attempts have been made to use it in catalytic convertors. Nanostellar Inc, a Silicon Valley developer of advanced materials, successfully completed the commercialisation of a gold-based catalyst.Central Bank ReservesAll central banks hold vast quantities of gold as one of the components of its reserves. The US holds 8,133.50 tonnes, equivalent to 74.2% of its reserves, Germany about 3,400 tonnes (71.4%), Italy 2,452 tonnes (71.2%) and France 2,435.40 tonnes (66.2%). The IMF holds 2,814 tonnes.Central banks, particularly in the emerging nations, have been aggressively increasing their gold holdings. They bought 192.3 tonnes of gold in the first half of this yea, compared with 72.9 tonnes in the corresponding period last year.The largest purchase was made by Bank of Korea, which purchased 25 tonnes. Platinum, not known to be held by any central bank, its availability is too small to become a reserve holding.

Store of Monetary ValueGold and silver were used as money before paper money was introduced. Russia had platinum ruble coins in circulation in the 1800s. Over the past 30 years platinum has been in demand for investment purposes. It is now available in form of coins and bars.Gold was chosen to serve as money as it has high value, is divisible without ruining its value, is durable and has longevity. What distinguishes gold and silver from paper currencies is that they cannot be created on a computer or on a printing press. Supply can be expanded only with increased mining or recycling.By the mid-1800, many countries abandoned gold as the currency and shifted to paper currency pegged to gold. Over time, government's decoupled their currency from gold, which meant currency could not be redeemed for gold. The US abandoned the gold peg for dollar on August 15, 1971. Following the recent volatility in the value of dollar, some have started debating whether dollar should once again be pegged to gold.

Correction in PricesGold prices are far more volatile than platinum, as has been evident during the course of this week. For that matter, over the past few days, as perception of risks eased, so did gold prices. Platinum prices draw their strength from economic cycles and industrial demand. When fears of a slowdown became a reality, platinum prices crashed in 2008. Such sharp corrections in platinum are unlikely unless China experiences a sharp slowing along with western economies getting into a recession.

Platinum: Today’s ‘Rich Man’s Gold’ Palladium: Tomorrow’s? David Morgan(Silver-Investor.com) is a

widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. 

The Platinum Group Metals (PGMs) are a family comprised of 6 metals – platinum, palladium rhodium, iridium, osmium and ruthenium. But for our purpose today (and for most investors), we are only interested in the first two – platinum and palladium.

Platinum is usually more expensive than gold. But for well over a year, it actually traded for less – substantially less. One could purchase a troy ounce of platinum for $150 or so less than a troy ounce of gold. (As a side note, during the time of this unusual inverted pricing relationship, in expectation of the “norm” reestablishing itself, I placed a long platinum/short gold spread trade. Of course, this did indeed take place and I was able to make a good profit on the trade.)

That relationship has reverted to its historical norm, and at this writing platinum now trades for better than a $150 premium to gold. Interestingly, during the 40 years before the 2008 financial crisis, platinum traded at a premium to gold of between 30% and 180%. Since then prices for the two have become much more closely correlated. What’s also true is that platinum (and palladium) being such relatively small markets, have demonstrated the potential for being much more volatile on both the upside and the downside compared to gold.

Over the last couple of years, we have paid more than the usual amount of attention to this evolving precious metals ‘sidebar’ story. We have extensively covered an intriguing Canadian project via on site/video interview visits, as well as issuing special reports/company analyses in The Morgan Report – all available to subscribers on the silver-investor.com site.

What’s so intriguing?

First is the overall size of the platinum/palladium market. Like silver, the PGMs can be thought of as ‘two-doors metals”. That is they have industrial, as well as investment demand. A strong case can be made that both of these demand components have the potential to grow substantially going forward. If, compared to other investment vehicles like bonds, real estate, tech and bio stocks, the gold and silver markets (including mining shares) are small, the platinum market is tiny - and Palladium’s is infinitesimal!

The world supply of platinum is about one-tenth that of gold; less than one-hundredth that of silver. (It’s been stated that all the platinum ever mined would fit into an average American living room.) Whereas during the 1980’s and ‘90’s above ground inventories were largely in surplus, since 1996 net reduction has swung this picture into the deficit column.

Russia and South Africa alone account for around 86% of global platinum production – which has been declining for both since 2006. North America and Zimbabwe supply 4% each, with “Others’ making up the remainder. As overall production struggles, recycling plays a key role in filling the gaps. Demand components: Auto industry (catalytic converters – generally for gas burning engines) 30%; Jewelry 28%; Industrial uses 35%; Investment c. 8%.

It’s estimated there are over 5 billion ounces of above ground gold, compared to about 200 million ounces of platinum. Unlike gold, there are no large stockpiles. So while the metals in nature are equally rare, annual platinum mined equates to only a small fraction of that for gold. Indeed, for 2012, Johnson Matthey reported

that platinum supply was approximately 8.5 Moz (mining 6.5 + recycling 2 .0 Moz respectively). For palladium, supply was about 7.4 Moz. In comparison, global gold production was around 2,500 metric tons or a bit over 80 million troy ounces.

For a number of applications, platinum is actually more favored by jewelers than gold. It is 10% more dense extremely durable and does not need to be ‘enhanced’ with other metals, as gold does, e.g. in the creation of ‘white gold’. To express certain attributes in its fabrication, gold needs to be combined with palladium, nickel or rhodium. 

Though platinum was only officially discovered in the 1700’s (the Spaniards ran into it in the 1500’s while mining for gold and silver in the New World), ancient indigenous South Americans used it in ceremonial jewelry. Still farther back in history, caskets in ancient Egypt have been found adorned with gold, silver – and platinum.

Not known to exist in Canada until 1888, it was discovered in Sudbury, Ontario, alongside copper and nickel deposits. Sometime thereafter, until the early 1950’s Canada was actually the world’s largest platinum producer, before being supplanted by South Africa.

Sprott’s Thoughts points out just how complex and dangerous the mining of gold and PGMs in South Africa can be. Relatively thin ore seams slope downward and instead of a mechanized approach, must often be dug out by individual miners operating along cramped, narrow stopes. As Sprott’s Andy Jackson notes: 

“It’s a really nasty job for the guys in the mines. It’s hot and it’s cramped. It’s also dangerous – there are rock falls and ‘rock bursts’ simply because of the pressure. All kinds of things can go wrong at that depth.”

Palladium – an even more compelling narrative

Now consider that palladium is 15 times rarer than platinum. Often found as a byproduct of platinum, around 68% of its annual supply is used in the automotive industry in catalytic converters (preferred for diesel engines). An additional 4% goes into jewelry, 7- 8% for dental, 14 % for electrical and 8% to “Other”.

 40% of the world’s palladium supply comes from a single location in Russia (Norilsk), though several North American mines produce it as well. Platinum and palladium are so critical in many industrial uses that Japan has designated PGMs to be one of the most important metal categories in its national resource acquisition policy. 

Palladium-containing components are used in an array of electronic devices. It is utilized in a new type of composite metallic glass, called “DH3”, under development by the California Institute of Technology. Benefiting from palladium’s “high bulk to shear ratio” it is reputed to be as tough as steel.  It is a component in some fuel cells, and is in demand from the healthcare industry in dentistry and medicine. A process using palladium nanoparticles has been developed, enabling synthesized drug delivery to precise locations inside the human body.

This brief discussion would not be complete in my view, if we did not examine what happened to the palladium market in the early 2000’s. We had clear evidence of an industrial driven demand taking the price sky high in “panic” buying.

At the time, Ford Motor Company and others were moving from platinum to using the less expensive palladium in catalytic converters, in order to save money. This PHYSICAL demand by Ford drove the palladium price to approximately $1100 per ounce! Furthermore CLEAR EVIDENCE of how the paper and the physical price were able to separate greatly.

In order to stay in the Futures Market (the paper game) contract holders were required to put up 2X the physical price! Yes, you read that correctly - you had to pay TWICE the amount of the physical delivery price, in order to keep your paper claim! Obviously the exchange wanted as many traders as possible out of the paper market!

 This is brought to your attention, because few people know of these facts and many have asked me over the years if this will (or could) happen in the silver market. To that question, let me simply state—we already saw it take place in one of the other white metals…so be prepared!

Like Silver, PGMs are ‘restless metals’

Platinum and Palladium generally trade in a reasonably identifiable price ratio with each other, but on occasion, they are fully capable - as the charts below demonstrate - of creating solo price surge moon shots. They tend to rise alongside increasing gold and silver prices too, but here again they can make large moves on their own.

Palladium – currently, First among Equals?

As you look at chart formations of ‘the big four’ precious metals, which seems to have the best looking pattern these days? I’d say…Palladium.

PGM ETPs – An evolving investment demand dynamic

 An Exchange Traded Fund (ETF) is a security that tracks an index, commodity or basket of assets. As a category, these products, including ETNs and various trust-type vehicles are generally referred to as Exchange Traded Products (ETPs). Most people probably assume that resource sector ETP holders are either individual investors, or managers of hedge and investment funds. However, in addition to being merely an investment vehicle, it is conceivable that physical metals’ supplies could – and are – being accumulated for eventual use within a given country as part of a strategic reserve. Confirming this premise, a Mitsubishi Corp official has been quoted as stating, “In a broader sense (ETFs), allow Japan to accumulate a stockpile of physical precious metals domestically by storing them in warehouses designated by MC within the country”.

The rise of gold and silver ETFs, especially GLD and SLV respectively, have had a significant effect on the price of precious metals over the last decade. What we’ve seen happen with available supplies of gold and silver is now in the process of taking place with platinum and palladium.

 Several ETFs have been created to purchase and hold the PGMs. Earlier this year in just 6 months, an ETF set up in South Africa, took over 150,000 ounces of platinum off the market.

 A possible palladium choice is the ETFS Physical Palladium Shares (NYSE: PALL), with good liquidity, trading as much as 50 - 80,000 shares/day.

 Another example is the Sprott Physical Platinum and Palladium Trust (NYSE Arca: SPPP), an exchange-traded investment alternative (ETP) to holding the physical

metals. The trust purchases palladium and platinum in equal dollar amounts, resulting in a 2:1 Pd/Pt ratio. This is a closed end fund, which can trade at a premium or a discount to its net asset value (NAV), since, unlike an ETF, it does not “rebalance” itself in real time. 

Demand is King 

At Silver-Investor.com we like the story of how the early Spaniards dealt with platinum when they first ran across it in alluvial deposits in nugget form – which for platinum is rather uncommon since it is normally found in association with other metals. They named it “platina” – ‘little silver’ and tossed it back, presumably to mature and become more silver-like later on. Of course, we now call it “platinum”.

 

While remaining mostly focused on the price movements of gold and silver – as you should – consider also looking more deeply into the potentially-explosive PGM supply-demand situation. What is now being established is a trend of falling supply and rising demand. If you find this story to be compelling, pay particular attention to how palladium’s price handles upside resistance levels near $780/800/850. (Platinum has to contend with a series of resistance belts in the areas of $1550/1600/1750/1800, and finally 1900.)

 

Don’t be too concerned about nuances in the supply side when you hear a talking head comment that “supplies of PGM’s are increasing” or “there may be a slight surplus next year,” etc. As I have often stated and will continue to repeat:

 

“Being in surplus does not have as much effect on price as investment demand - if it did, gold would still be under $300 per ounce, and it is NOT!Markets move on demand; whether that demand is industrial or investment means little to the market - demand is the real driver.”