by Justin Dove, Investment U Research
Wednesday, August 31, 2011
I hate to break it to you folks…
Gold is in a bubble. The rise in prices has been more about speculation and fear than supply and demand.
It’s anyone’s guess as to when the bubble will burst. But it will eventually, just like real estate and tech stocks did over the past decade or so. But the idea that gold has surpassed the price of platinum at any point is unbelievable. It will never last.
Platinum credit cards are better than gold cards. “Going platinum” in the music industry is better than having a gold record. Likewise, platinum is a better investment than gold…
Platinum: Following Gold Without the Downside Risk
When investing in platinum, think of it as a precious metal that will take advantage of the same things that drive gold, but without so much downside risk. In the chart below, it’s obvious that platinum rarely falls to gold prices. When a platinum bubble burst in 2008, it quickly reverted to its average level above gold.
So now that gold and platinum are about equal, platinum is the metal to invest in. If gold goes down, platinum shouldn’t go down quite as far. If gold goes up, platinum should eventually rise higher. Any breaches of platinum’s price will be short-lived.
Some may suggest that gold is more of a currency and safe haven than platinum. But those that honestly believe the world is going to fall to anarchy may as well invest in guns and lead. Those will be far more valuable than gold in a post-apocalyptic world.
Now those using gold as an inflation hedge due to debt concerns may have a better case. But platinum is a superior metal to gold for two major reasons:
- Industrial Demand
Industrial Demand For Platinum Spikes
According to the Platinum 2011 report by Johnson Matthey, gross demand for platinum grew by 16 percent in 2010. This was mainly driven by a 48 percent spike in gross industrial demand, and 43 percent growth of demand in the metal for catalytic converters.
The increase was magnified by the sharp drop in demand following the global crisis in 2009. However, emerging market demand is expected to continue the industrial upswing. One of the biggest trends in emerging markets is automobile consumption. Platinum is a vital component of catalytic converters in all vehicles, but especially in diesel cars.
Europeans began incorporating more diesel engines in 2010. The diesel market expanded to 48 percent of all European cars in 2010. This helped platinum demand in Europe grow 51 percent.
Production of heavy-duty diesel trucks increased in the United States and around the world. The United States also increased emission standards for heavy-duty diesel in 2010, leading to bigger loads of platinum in the catalytic converters.
Platinum is used in a plethora of other industries including:
- Glass-making for LCD and LED televisions screens.
- Hard Disk Drives
- Plating and Thermocouples
Who knows though, maybe all these doomsayers are on to something and the global economy will grind to a halt. But, there’s still a reason that platinum will always be more valuable than gold in the long run…
Platinum is between 15 and 30 times more scarce than gold. All the platinum mined to date is said to fit within a 25 foot cube.
Adding to the scarcity is how expensive it is to produce. High prices have supplies expected to increase slightly over the next few years. But there is an obvious downtrend in global supply and production over the past five years.
Eventually demand should outstrip supply and raise prices to astronomical levels. However, if the world does end in 2012 platinum will still be 15 times more scarce than gold. While it may not be used as a currency, it should still carry a higher value.
Alternate Ways to Invest
Adding to the demand and scarcity of platinum are new exchange-traded funds – the most popular is the ETFS Physical Platinum Shares (NYSE: PPLT) designed to track the precious metal. These funds soak up physical platinum and assume the costs and responsibilities of safely holding the metal. They also command a price of one-tenth the value of an ounce of platinum. This, plus the convenience of not having to safely store the physical metal, makes it a very attractive investment for average investors.
It may also be wise to get exposure to top platinum mining companies. These companies will profit highly from increased margins due to higher platinum prices. Here are some notable companies:
- The number one company in the production of platinum group metals is Anglo Platinum Ltd (OTC: AGPPY.PK). It has a market cap of $37 billion and profit margin of 24 percent. Anglo Platinum is a subsidiary of mining giant Anglo American Plc (OTC: AAUKY.PK). Anglo American has an 80 percent stake in Anglo Platinum.
- Stillwater (NYSE: SWC) is an American platinum mining company based in Montana. It has a relatively small market cap of $1.47 billion, but is trading more than 40 percent below its 52-week high. Once the profits start to roll in from these high platinum prices, Stillwater should experience some growth.
Even if platinum doesn’t go any higher, it shouldn’t fall as much as gold will. The spread between the prices should eventually revert to normal platinum premiums. While gold has many uses and values as currencies, the scarcity and industrial uses of platinum will continue to balance it higher than gold.