Trade The Rally In Platinum
Making 41% on any investment is great. Making that same return in less than 2 months is nothing short of phenomenal. Hedge fund managers dream about those kinds of returns. Some savvy investors don’t need to dream. Investors in platinum have already recorded gains of more than 41% this year. That’s right, more than 41% since the start of the New Year.
Look at the chart below. Historically, platinum was seen as an ugly step-sister to the more popular and desirable gold. This has changed as of late. Gold and the other precious metals are starting to share the spotlight with platinum, especially when it started trading for more than $2,000 per oz.
Platinum is a precious metal rarer than gold and much harder to mine. In fact, King Louis XV of France declared it the only metal fit for a king.
But, do we really need platinum?
The two largest uses for platinum couldn’t be more different. One major user is the jewelry industry, the other is the pollution control industry. Very different I know, but it is hard to argue the facts. Platinum has always traded at a premium to gold and a resurgence of demand has been seen in the jewelry market. This precious metal has found a special niche in high end pieces, which are often acquired by the wealthy.
Don’t believe me about platinum’s demand in jewelry? Just ask your wife or girlfriend . . . on second thought don’t. That may be a very expensive question!
Amazingly, the same metal used in jewelry is also used in pollution control. Platinum is most commonly found in catalytic converters which reduce pollution. I won’t bore you with the details of how they work, but know this: every gasoline and diesel powered vehicle built since the 1970s has a catalytic converter. And every catalytic converter contains platinum. Some vehicles have several hundred dollars worth of this precious metal.
So, why is the price skyrocketing?
Like most things, a rising price is the result of a supply and demand imbalance. When the price of a commodity starts climbing, more supply is sold into the market. Unfortunately for consumers of platinum, demand keeps climbing but new supply is actually falling. South Africa, which produces about 80% of the world’s platinum, has been hit with rolling blackouts. These blackouts shut down the mines which reduces production.
South Africa is suffering because they don’t have enough electricity. Because you can’t just “toss up” a 500 megawatt power plant, these rolling blackouts are expected to continue for some time. Some mining companies have gone as far as announcing potential reductions in the workforce due to this issue.
The hoarding begins.
When prices rocket upwards a natural human reaction is to hoard valuable goods. We have seen it in other commodities and no doubt we will see it soon in platinum. Leading the hoarding charge has been a new ETF on the London Exchange which buys and holds platinum. We have seen similar types of ETFs here in the United States focused on gold. Essentially, this ETF buys up the commodity and puts it in a warehouse. This effectively removes supply at a time when it is most needed . . . . and drives prices higher.
How do we make money?
Supply and demand for platinum is out of balance. I would expect this commodity to continue trading higher at least in the short term. Profiting from a continued surge in platinum prices can be as simple as buying platinum futures, but futures contracts can be risky.
For our international readers, I would look to buy the London traded Platinum ETF (PHPT) issued by ETFs Metal Securities Ltd. For US-based investors who don’t want to buy futures or options on futures, your only option is to buy shares of platinum mining companies. One of the largest I have found is Stillwater Mining (SWC).
Category: Commodities
