Investing in Platinum Group Metals
by Jonathan Buhalis
Investors are now the main propulsive force behind rising prices of the "other" precious metals - platinum and palladium - as they are for gold and silver.
Fresh investment demand, especially in Japan, "has required higher prices to encourage existing holders of platinum to part with their metal," consultancy GFMS says in a recent report on the industry.
In the case of palladium, investors have been mopping up a substantial quantity of surplus metal. Interest has been stoked by expectations of a narrowing in the price differential between the two metals.
The two metals are found together in the same ores and have similar but not identical characteristics. Palladium is less effective than platinum in some kinds of anti-pollution devices, especially those used with diesel engines. It has half the density of platinum, so jewelry made from it is much lighter for the same volume of metal.
While jewelry manufacture provides most of the annual demand for gold, it is much less important for platinum and palladium, where it accounts for less than one-fifth of consumption. Palladium jewelry demand has recently increased due to its substantially lower prices than platinum and gold, and its similar attributes to platinum.
PGMs have unusual qualities which make them prized in a wide range of industrial uses.
For example, catalytic converters now fitted to all new motor vehicles produced in advanced nations convert poisonous exhaust gases such as oxides of nitrogen into water and other harmless substances, reducing air pollution. Autocats account for roughly half of world demand for platinum and palladium currently.
The two metals are also used as catalysts in oil refining and chemicals industries, and in the manufacture of a wide diversity of products such as computer monitors, mobile phones, electronic weaponry, hard disc drives, temperature control instrumentation and synthetic fibres.
Although the combined global market for the two is larger than for silver, and one-seventh the size of that for gold, investment interest has been negligible in the past, but is gaining considerable momentum.
Gold and silver have traditionally been regarded as potential investments and as alternatives to currencies, but there is no such tradition with the PGMs, apart from platinum in Japan.
Much of the recent investment buying into commodities has been through funds linked to major indexes, which have no PGM contents.
Both metals now have exchange traded funds (ETFs), joining gold and silver.
Wealthy individuals are starting to buy Investor interest generally is growing. GFMS makes these comments in a recent survey:
"Activity in platinum is mainly coming from a relatively small number of hedge funds and commodity trading advisers." They have also been making most of the running in palladium. But there is now also some interest by high net worth private investors.
Whereas some investor demand for gold is driven by expectations of a collapse in the dollar or an event-driven spike in the oil price, as a rule, investors are not taking positions in platinum or palladium for this reason, nor to hedge their other investments.
There is little evidence of short selling of platinum. And "the shallow pool of bullion stocks, coupled with a market essentially in balance, has required fairly large price increases to persuade existing holders of stocks to part with their metal."
Retail investor interest remains at a very low level for platinum, but some interest in palladium coins and small bars has developed in North America.
As with gold, investment demand is becoming increasingly important for the PGMs because of worrying fundamentals.
In the case of platinum, the longstanding shortage in annual supplies has now disappeared because of greater mine production and fast-rising recovery from autocatalyst scrap, with demand growth now sluggish.
That's primarily because of competition from palladium, which has made a spectacular debut in jewelry, mainly for the market in China. Palladium is much cheaper for jewelry buyers - yet offers hugely profitable margins for manufacturers and merchants.
Over the past seven years, jewelry-industry consumption of palladium has more than tripled, to 750,000 ounces, while equivalent demand for platinum has fallen by 40% or 1.2 million ounces.
Nevertheless, the GFMS consultancy remains positive about platinum, one reason being that demand is now less sensitive to conditions in the jewelry market, with three-quarters going for "essential/inflexible" applications. And there are no substantial above-ground stocks.
In palladium, the problem is a huge overhang of stocks, which GFMS estimates could be as much as 15 million ounces - equivalent to two years of global demand for the metal. And the stockpile is growing. There have been five years of surplus, which reached a record 881,000 oz in 2005.
Should you invest in these metals? Longer-term, without a doubt. Their unique characteristics make them much more important in industry than the other precious metals, and they are much rarer. Worldwide, anti-pollution regulations get steadily tougher, and the PGMs are big beneficiaries of this trend.
Shares of certain listed mining companies largely depend on earnings from the metals. Most of these operate in South Africa, such as Angloplat, Impala and Lonmin, and the smaller Aquarius and Northam. Outside South Africa, there are Stillwater and North American Palladium in the US. Other listed companies such as Norilsk Nickel of Russia and Inco of Canada are primarily miners of base metals.
Derivatives-based products geared to PGM prices are listed on securities exchanges, particularly in Germany. Futures are traded on the Tocom (Japan) and Nymex (US), as well as London's Platinum and Palladium Market.
There is an active market in platinum bars in Japan and Switzerland. Swiss banks, for example, will store them for you for a small fee. The Perth Mint, owned and guaranteed by the government of Western Australia, sells certificates giving ownership of physical metal in bar or coin form, for a minimum investment of US$10,000. Demand is growing in the US for such large bars as well as platinum coins and mini-bars. The same is true of palladium.
Platinum Group Metals
Investing in PG Metals
History of Platinum
Investing in Platinum