25th February 2019.
With issues arising from Brexit and the world economy to be taken into consideration, many investors are currently setting their sights on gold, a traditional safe-haven. Today we will examine the merits of investing in platinum, gold’s rarer counter-part.
With the issues arising from Brexit and the world economy to be taken into consideration, many investors are currently setting their sights on gold, a traditional safe-haven.
Could there be a better option to gold? Today we will examine the merits of investing in platinum, gold’s rarer counter-part.
A brief history of platinum dates officially back to the 18th Century, but throughout ancient times the uses of platinum have been documented since 700 B.C. The earliest known object that contains platinum would be the Casket of Thebes, an Egyptian sarcophagus that was found in Upper Egypt. It was inscribed with the name Shepenupet II. The casket is decorated with gold
and silver hieroglyphics with a mixture of platinum group metals. During the 18th Century, platinum was “rediscovered” by Antonio de Ulloa- a Spanish naval officer who returned from Ecuador
with descriptions and samples of the silvery white metal in 1746.
Platinum is used extensively in Jewellery and has a shimmery silvery-white appearance. The metal is a lot heavier and harder than gold, making it easier to work with in higher quantities of the raw material product. It is not uncommon to find platinum rings for instance to contain 95% platinum, whereas an 18ct gold ring would contain only 75% gold typically. Jewellery is only the second largest use for platinum – the main use is industrial, in particular in the automotive industry, where platinum is used in the production of catalytic convertors.
A catalytic converter is a device that reduces the amount of harmful pollutants emitted by vehicles. Harmful emissions of hydrocarbons, carbon monoxide and nitrogen oxides that are damaging to the atmosphere, are converted into water vapour and less harmful gases via a series of chemical reactions. All petrol cars manufactured since 1993 must have a catalytic converter fitted to the exhaust. Catalytic convertors contain platinum, rhodium and palladium which makes them a valuable target for thieves. Palladium prices have climbed more than 50% since mid-August last year due to a supply deficit, fuelled by demand from car makers to meet emissions targets. Palladium is now more expensive than gold, currently trading at over $1500/ounce, with prices set for a seventh straight monthly gain.
Palladium is currently experiencing a supply squeeze, with stricter environmental standards and the increased demand for cleaner-burning gasoline engines—which require converters with more palladium—means demand for the metal both among auto makers and thieves is likely to remain high. A catalytic convertor can contain 3-7 grams of platinum, but the amount varies based on manufacturer and model. The way palladium is mined may be a cause for the supply issues and also explain why it has maintained its current high price. Palladium is mainly produced as a by-product from platinum in South Africa and nickel in Russia, so a price increase does notnecessarily lead to higher mine production.
With current price of palladium pushing near all time highs, it would be natural to question what is happening to the price of platinum at present. Platinum is currently trading near the $850/ounce level, which is very low compared to its historic levels, as shown by the 5-year graph below. So what has been affecting the price of platinum? The recent drive by global governments to reduce vehicle emissions should surely be a boost to the price of platinum, but the situation is not that simple for many reasons, one of the main being diesel.
Diesel car sales continue to plummet globally even in a declining market due to new hybrid and electric vehicle engines. Governments are keen on tackling the issue of pollution and are making it more expensive to drive higher emission vehicles. We look at the specific government-based policies that are driving down the demand for platinum. In 2017 various clean air
initiatives under c40 were announced. In the past a lot of emphasis was put on reducing carbon dioxide, but now there is greater focus on cutting emissions of smog-forming nitrogen oxide (NOx) from diesel cars. This is driving a switch to treatment systems that use less platinum. After-treatment systems are needed to cut NOx, such as a lean NOx trap (LNT) or selective catalytic reduction (SCR) systems. Real-world testing will push more manufacturers toward using SCR which use some 20 percent less platinum than LNT, according to leading catalyst manufacturer Johnson Matthey.
Because of this, a 20 percent reduction in the use of platinum is a big reduction, even more when considering the fact that Palladium is currently the only metal in a supply deficit situation.
Reduced production can be attributed to the Volkswagen emission standard cheating case (now referred to as “dieselgate”) and the resulting government actions in trying to move automakers away from diesel engines. But can we see a recovery in the price of Platinum or are we due to fall further?
The case against platinum would be a continued slide in diesel car numbers and a strong dollar which may put downward pressure on platinum if there were alternatives present, (as platinum is priced in dollars). China and Europe’s economies are facing further slowdowns, as platinum, with its heavy exposure to automotive and industrial use, is vulnerable if economic growth falls more than initially expected. We see the possibility of an improvement in the price of platinum dependant on a number of factors.
The supply of platinum is highly concentrated in South Africa, which is responsible for over two-thirds of global production. The Rand has fallen against the dollar approx. 18% last year making for favourable cost implications domestically for miners. Whilst mining may get cheaper, this may be more than offset by the falling demand for the metal, which could get to a point which may trigger a major strike at a grassroots level.
A strike like this occurred in 2014 at the miner Lonmin over employee pay. This could cause a major disruption in the supply of platinum, which would inevitably see the price start to rise again. Another potential price catalyst is essentially the reverse of today’s situation when referring to petrol-based emission reduction system, the replacement of palladium in gasoline autocatalysts by platinum. The more the price of palladium goes up, the more incentive there is to give platinum a chance as a substitute.
Aside from buying the standard synthetic ETF offerings from the likes of Blackrock or Vanguard, an investor can choose to look at something like the Aberdeen Standard Physical Platinum Shares ETF product (PPLT).
This ETF is a highly liquid instrument that does a job tracking the price action in the platinum market as it holds 100% of its assets in platinum bullion. Alternative equity options to consider would be companies such as Lonmin, (LMI.L) the south African based Platinum producer or Anglo-American Platinum the world’s largest primary producer of platinum, accounting for about 38% of the world’s annual supply. The ADRs can be purchased on the US stock exchange and track the domestic price, they currently trade near a 5-year high and the shares have benefited from the sharp rise in palladium.
Over the last few years there have been large price moves in various commodities, some up (vanadium) and some down
(uranium), so is it time to maybe have a look at platinum for your portfolio? Contact us today on 0203 697 1700 to discuss this
opportunity and the best way to implement the strategy.
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