Why is Platinum Valuable?
Platinum is a rare chemical element found in the earth’s crust. The greyish-white metal is one of the most intriguing commodities because its user base defies simple categorization. Business sectors such as the automotive industry demand platinum for use in catalytic converters, while traders covet the metal as a financial asset and store of value. Jewelry buyers seek platinum for its beautiful shiny appearance and resistance to tarnishing.
How Rare is Platinum?
The list of uses for platinum makes its comparison to gold seem obvious. However, by some measurements, platinum is even more rare than gold. Miners extract only about 130 million tons of platinum from the ground annually compared to more than 1,700 tons of gold.
Platinum mining is also far less efficient than gold mining. The process of extracting the metal from ores can take five to seven months and may require ten tons of ore to yield one ounce of platinum. The cost of mining an ounce of platinum is nearly twice that of mining an ounce of gold.
Only 200 million ounces of platinum reside above ground compared to 5 billion ounces of gold.
Where Does Platinum Come From?
Platinum is a dense metal that is also malleable and ductile. It is extracted from ore bodies in mines that contain the platinum group elements (PGMs). These elements – platinum, iridium, osmium, palladium, rhodium and ruthenium – all have similar chemical, physical and anatomical properties.
Miners generally extract platinum from placer deposits, which are naturally occurring concentrations of heavy minerals. These deposits accumulate as a result of the effects of gravity on moving particles. Platinum miners also extract the metal from sperrylite and cooperate, which are ores that contain platinum.
Recycling scrap metal also provides a portion of the metal’s annual supply.
Annual mining of platinum totals over 170,000 kilograms. This number has declined steadily in recent years as mining companies have cut back on production and closed mines due to low prices.
The Bushveld Complex in South Africa contains the largest reserves and supplies over 75% of the global output.
Top 5 Platinum Mining Countries
|Rank||Flag||Country||Mine Production (Kilograms)|
Platinum demand is global. Europe accounts for about half of the annual gross demand for the metal, while Japan and North America each account for between 10 – 15%.
China represents about 5% of the total annual demand for platinum, while the rest of the world accounts for the remaining approximately 20%. Gross demand includes the amount generated from recycling platinum.
Which Countries Have the Largest PGM Reserves?
PGM reserves are a measure of the quantity of economically mineable metals in the ground. South Africa has more than 90% of Earth’s PGM reserves.
However, mining is an expensive endeavor, and ultimately the price of the metals determines whether it is feasible to mine them.
Top 5 PGM Reserves
Most of the industrial applications for platinum were developed after the 1970s when air quality laws required catalytic converters on automobiles. The following industries generate most of the demand for platinum:
Top 4 Uses of Platinum
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What Drives the Price of Platinum?
Platinum has unusual anomalies on both the supply and demand side of the equation. Historically its demand derives from both traders and industry, which makes it similar to gold and silver, but different from almost all other commodities. As for platinum’s global supply, South Africa accounts for such a large percentage of it that it’s impossible to deny the impact this country has on prices.
The following five areas are significant determinants of platinum prices:
- South African Economy
- Health of Global Auto Industry
- Electric Vehicle Development
- Changes in Catalytic Converter Technology
- Investment Demand
South African Economy
In addition to producing more than 75% of the global annual output of platinum, South Africa accounts for 95% of the world’s proven reserves.
As a developing nation, South African markets are volatile and unpredictable. Events including labor strikes and political unrest have the potential to slow down production at mines. In addition, economic events and the manner in which politicians respond to those events can impact supply. Taxes, nationalization of assets and restrictions on land use all have the potential to impact mine output.
Health of Global Auto Industry
Catalytic converters account for nearly 40% of global gross platinum demand. Therefore, trends in the auto sector impact the price of the commodity.
Platinum prices tend to perform best when the auto industry is healthy and tend to slump when it is struggling.
Trends in environmental laws also can impact platinum prices. As developing nations pass stricter air quality laws and emission standards for vehicles, platinum prices should respond positively. Ultimately, the health of the auto industry mirrors the overall economy, so strong economic growth bodes well for platinum prices.
Electric Vehicle Development
Advancements in the development of electric vehicles and demand for these vehicles could depress platinum demand. There are several factors that impact demand for electric cars including the price of oil and implementation of stricter air quality laws.
Changes in Catalytic Converter Technology
Technological advances in the way automakers reduce exhaust emissions could impact platinum demand.
The relatively high price of platinum may incentivize auto manufacturers to seek alternative technologies. Palladium now replaces a portion of the platinum used in catalytic converters. If these technologies improve, then the demand for platinum might further erode. Ultimately, the high price of platinum may hasten these changes.
Investment demand represents a small percentage of overall annual demand. However, weakness in the US dollar and the high cost of gold could lead consumers to substitute investment dollars into platinum.
3 Reasons You Might Invest in Platinum
- Bet on Industrial Growth
- Bet on Weak US Dollar
- Bet on Supply/Demand Imbalance
Investing in platinum offers a way to express a bullish view on global growth. At the same time, many traders see platinum as a store of value and an insurance policy against dollar weakness. Here are three of the best specific reasons for investing in platinum
Bet on Industrial Growth
The auto industry is only one of many industries that use platinum in its products. Nearly one in five manufactured products uses platinum during some stage of the making of the final product.
As emerging market economies grow, demand for manufactured goods will grow as well. An investment in platinum is a way to bet on growth in global industry.
Bet on Weak US Dollar
Platinum is similar to many commodities in that it generally moves in an inverse relationship with the US dollar. This makes platinum investing a way to profit from the detrimental effects of a weak dollar.
Unrestrained spending by the United States government has produced large debts and deficits in the world’s biggest economy. The US government has an unlimited ability to print dollars to pay down this debt, and this can result in a significant loss of purchasing power. Investing in platinum and other hard assets protect traders from the erosion of wealth that occurs from a weak US dollar.
Bet on Supply/Demand Imbalance
Platinum supplies are limited and concentrated in only a few countries.
In recent years as a response to lower prices, companies have shut down mines and lowered production.
There are many possible events that could lead to a spike in platinum prices:
- Mining strikes in South Africa
- Safety failures at mines
- Increased consumer demand in developing nations
- Higher global exhaust emission standards
In an industry where supply is already constrained, these imbalances could greatly increase platinum prices.
Should I Invest in Platinum?
The most compelling reason to invest in platinum is diversification. Most investment portfolios have an extreme concentration in stocks and bonds, and commodities provide a way to mitigate some of this risk.
Platinum also offers traders a way to profit from growth in the automotive industry and the industrial sector in general. Emerging economies will continue to expand, and as they do so, their citizens will consume more manufactured goods. Investing in platinum allows traders to capitalize on this trend without having to invest in local emerging country stock markets.
Investing in platinum allows traders to profit from a weak dollar as well as strength in consumer spending. Growth in large industrial economies such as the United States has often occurred at the expense of a strong currency. In fact, US policymakers have kept interest rates low to stimulate consumer borrowing and grow exports.
Investing in platinum, however, does have its risks:
- A slowdown in the auto sector or a global recession would almost certainly depress prices.
- The development of new automotive emissions-reducing technology could also sink prices.
- Significant Fed tightening and strength in the US dollar may lead to weaker platinum prices and weaker commodities in general.
Expert Opinions on Platinum
Some experts see platinum investing as an alternative investment to gold. John LaForge, head of real-asset strategy at Wells Fargo, believes that platinum prices represent a more affordable way than gold to invest in precious metals.
Another leading expert sees favorable long-term fundamentals including increased use of platinum in industrial applications and constrained supplies as reasons for bullishness:
“In particular, auto sales in Europe have been growing strongly, and so far there is no sign that the political uncertainty there is having any impact on consumption. What’s more, underinvestment and reserve depletion in South Africa will continue to constrain any growth in output.”
Capital Economics commodities expert Simona Gamborini
One expert, however, is less optimistic and believes increased use of palladium in catalytic converters is curtailing demand for platinum.
“Diverging demand expectations for platinum group metals [are] creating a price parity for palladium and platinum not seen since 2001. Palladium is benefitting from its inclusion in catalytic converters in gasoline-powered vehicles.”
Commodities broker SP Angel
How Can I Invest in Platinum?
Platinum traders have several ways to invest in the commodity:
|Method of Investing||Complexity Rating (1 = easy, 5 = hard)||Storage Costs||Security Costs||Expiration Date||Management Cost||Leverage||Regulated|
*Storage costs are passed on to traders in the form of management fees.
Investors can buy platinum bullion bars and coins from metals dealers in the same way they can buy gold or silver bullion. In the United States, for example, traders can purchase American Platinum Eagle coins that have a purity of 99.95%. Platinum bars are fabricated at foundries in different sizes including one ounce, ten ounces and 1 kilogram. Buying physical platinum requires storage units such as safety deposit boxes or secure safes.
Here are some online platinum bullion dealers you might consider:
The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), offers platinum futures contracts. These derivative products have the longest history among all metals products traded on the exchange.
Futures traders use leverage to buy contracts tied to the price of platinum. If prices decline, traders must put up additional margin to maintain positions. Investors must also either roll futures contracts forward each month or accept physical delivery. Investing in the futures market requires sophistication and active maintenance of positions by the trader.
Options buyers pay a price known as a premium to purchase contracts. An options call bet succeeds only if the price of platinum futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in platinum futures to profit from their trades.
Platinum options are also a derivative instrument that trades on the NYMEX. Like futures, options have an expiration date. However, unlike futures, option bets succeed only if the price reaches the strike price by the expiration date. Options buyers pay a premium to the seller in exchange for the right to exercise the option in the future. Options traders must make correct determinations about the size and timing of platinum’s move in order to profit from their trades.
These financial instruments trade as shares on exchanges in the same way that stocks do. There are several ways to invest in platinum using exchange-traded funds (ETFs). Below is a list of the most popular platinum ETFs:
|ETFS Physical Platinum Shares||iPath Dow Jones-UBS Platinum ETN||Sprott Physical Platinum and Palladium Trust|
Shares of Mining Companies
There are many publicly traded companies that have some exposure to platinum prices.
While investing in companies can be a leveraged way to gain exposure to platinum prices, many of these companies have significant exposure to other precious metals. In addition, factors such as company management and the overall stock market can also affect these investments:
|Current Price||Overview||Listings||Founded||Number of Employees||Interesting Fact|
|Anglo American Platinum||The world's largest primary producer of platinum||Johannesburg (JSE)||1995||28,000||Accounts for c.38% of the world's annual supply of platinum.|
|Impala Platinum||A leading producer of platinum and associated platinum group metals||Johannesburg (JSE)|
|1967||53,000||Originally known as Bishopsgate Platinum|
|Lonmin||A British producer of platinum group metals||Johannesburg (JSE)|
|1909||24,000||The business once owned the British newspaper The Observer|
|Norilsk Nickel||Russian nickel and palladium mining and smelting company||London (LSE)|
|1993||96,000||Roman Abramovich, owner of UK football team Chelsea FC is one of the owners.|
|Sibanye Stillwater||The third largest producer platinum||Johannesburg (JSE)|
New York (NYSE)
|2012||Not disclosed||Also one of the World's top ten gold producers.|
One way to invest in platinum is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of platinum without purchasing bullion, ETFs, futures, options or mining shares.
The value of a CFD is the difference between the price of platinum at the time of purchase and the current price. As platinum prices increase, the value of the CFD increases, and as platinum prices decline, the value of the CFD declines.
Many regulated brokers worldwide offer platinum CFDs. Customers deposit funds with the broker, which serves as a margin. The advantage of CFDs is that trader can have exposure to platinum without purchasing or storing bullion or having to manage complex futures or options positions.
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