November 8, 2016
A Dynamic Commodities Exclusive
Platinum is a precious metal that goes by the nickname “rich man’s gold.” That is because platinum is a rarer metal than gold with a higher production cost. There is around 250 tons of platinum production each year while gold output tends to be in the neighborhood of 2,800 tons.
Each year, 80% of platinum output comes from South Africa while Russia produces the majority of the balance as a byproduct of their nickel production. Platinum has a higher melting point than gold which increases the metal’s industrial applications.
Over the past four decades, platinum has tended to command a premium to gold. The median premium has been around the $200 per ounce level over the forty-year period. In 2008, the price of platinum exceeded the gold price by $1200 per ounce. However, in June of 2016 platinum fell to a price that was a discount to gold of $350 per ounce, an all-time modern-day low in the price relationship. The reason for the discount was two-fold. First, as an industrial metal the bear market for commodities depressed many metal prices and demand for platinum-based automobile catalytic converters declined. Second, and perhaps more importantly, investor demand for gold increased dramatically while platinum demand as an investment vehicle remained tepid.
Platinum and gold are both precious and rare metals that occur in the crust of the earth. The path of least resistance for both metals each year tends to rely on buyers who hold the metals as a store of wealth. However, gold has a long history as a currency or means of exchange. Central banks around the world hold gold bullion as part of their foreign currency reserves, but they do not hold platinum.
“Rich man’s gold” has been cheaper than gold since 2014 but the rare nature of platinum could mean that it will once again command a higher price than the yellow metal in the future. Given the long-term trend in the precious metals market, platinum has become cheap on a value basis, compared to gold. Deviations from long-term price relationships are common in the volatile metal markets. The discount of platinum under the price of gold is one of those divergences. At a discount, platinum is no longer as good as gold, but it is likely to be better one day in the future.
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