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Platinum Seen Outperforming Gold If Economy Keeps Improving, Supply Issues Persist

By Allen Sykora of Kitco News
Wednesday January 8, 2014 1:08 PM

(Kitco News) - Platinum has outperformed gold for months now on ideas that the more industrially oriented metal will see greater benefit from an improving economy, and most analysts and traders look for the trend to continue.

One analyst cautions, however, this may hinge on whether expected supply disruptions occur in the South African platinum-mining industry. If not, then platinum is likely to lose some of its premium against gold, at least in the foreseeable future, he continued.

As of mid-morning in New York, spot platinum was trading at $1,406.75 an ounce and gold was at $1,221.50. This left the platinum/gold ratio around 1.15, meaning it took 1.15 ounces of gold to buy an ounce of platinum. This was the highest ratio since June 2011, said Bart Melek, head of commodities strategy for TD Securities.

“Increasingly, I think we’ll see a decoupling of industrial precious metals from gold,” Melek said.

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In particular, analysts cited expectations for economic growth to keep picking up.

“That’s normally not very positive for gold,” said Michael Widmer, metals strategist with Bank of America Merrill Lynch. “But platinum, having more of an industrial component on the demand side, benefits from that.

“It’s a trade that we have been advocating for 12 months now,” he said, adding that he looks for the trend to continue, eventually taking the ratio to 1.25.

The largest single use for platinum is catalytic converters. According to the Platinum 2013 Interim Review from Johnson Matthey, auto-catalyst demand for platinum was 3.125 million ounces last year out of total gross demand of 8.42 million.

The main way investors take a position on the platinum/gold spread is through the futures market, explained Peter Hug, global trading director for Kitco Metals. A trader would buy the metal he or she thinks would outperform while selling the underperforming one. Since the main New York gold futures contract is 100 ounces and the platinum contract is 50 ounces, a trader’s position would have to include two platinum contracts to one for gold.

George Gero, precious-metals strategist with RBC Capital Markets Global Futures, said another industrial metal, copper, also has fared better than gold over the last year.

“The improving economy and improving car sales have underpinned platinum,” he said, calling for the metal to keep outperforming. “We’re looking for 16 million (U.S.) car sales or better in the coming year.”

Platinum does not necessarily have to move higher for the ratio to rise; the metal simply needs to hold up better than gold, Widmer explained. Both are down since gold hit its record high in September 2011, but platinum has not fallen nearly as much.

Gold is driven more heavily by investment demand, meaning less potential buying when investors turn away from the yellow metal, Widmer explained.

“Platinum has industrial demand,” he continued. “That has been holding up overall much better than investor demand on the gold side.”

Further, a supply/demand deficit in the platinum market in 2013, with another anticipated this year, is expected to draw investment buying of the metal, Melek added. Johnson Matthey estimated the 2013 platinum deficit at 605,000 ounces.

Analysts also cited potential for more supply disruptions in South Africa as another factor that could boost platinum. The country is especially important to this commodity, providing some three-quarters of the world’s primary mine supply. There have been strikes in recent years, with threats of more, plus ongoing worries about availability of electricity needed for mining far below the ground. Further, many producers are not faring well financially despite a soft South African rand, Melek added.

“We expect pretty hefty deficits in platinum over the next several years,” Melek continued, with higher prices likely necessary before producers will have incentive to ramp up output.

Hug said platinum has historically traded at a premium to gold, especially at times when the economic environment is healthier. The premium was $185.25 as of mid-morning, basis the spot market.

“In very short periods of time, platinum has actually been at a discount to gold,” Hug said. “But it’s extremely rare. It tends to trade around an $80 to $100 premium to gold in normal market conditions.”

The premium currently is larger than this, however, with ongoing worries about potential supply disruptions in South Africa, he explained.

“The platinum premium has increased relative to gold because, first of all, it’s much more difficult to produce,” Hug said. “The supply/demand fundamentals for platinum are much better than gold. There is an expected shortage in global platinum supplies. There was a small shortage in 2013 and that shortage is expected to increase in 2014.”

If the economy keeps picking up, demand for autos should increase at a time when there are worries about more strikes in South Africa.

“The expectation would be it (the premium) would widen more from current levels if the situation in South Africa continues to deteriorate,” Hug said. Strikes, or supply cuts due to any electricity shortages, could mean platinum’s premium widens to more than $200 an ounce.

However, Hug said, if the labor strife abates in South Africa, then the platinum premium over gold might have gotten “ahead of itself” and could move closer to its norm, maybe back toward $125 to $140 initially.

There still would be a small supply deficit for platinum in 2014, he continued. “Then everything will hinge on whether the economic recovery…is real or just a head fake,” he said.

Melek figures the platinum/gold ratio could climb to the 1.5 area. He looks for a 1.43 average in the third quarter, based on the current TDS forecast gold to average $1,150 an ounce in the third quarter while platinum averages $1,650.

TDS sees potential for gold to be held back as U.S. Treasury yields creep higher. This increases the so-called opportunity cost of holding gold, or the lost income from holding a non-yielding asset. Also, inflation remains contained and investors are still looking toward risk assets such as equities, he explained.

Meanwhile, he said, there is potential for platinum demand to pick up after a “fairly rough” year. In particular, there are hopes that Europe’s economy will pick up, especially helpful for platinum since the metal is used in auto catalysts for diesel-powered cars such as the ones popular in Europe. Meanwhile, the supply profile for platinum is “fairly lousy,” Melek said.

Hug said he likes platinum group metals in general.

“I’d be a bit more aggressive on them halfway through 2014,” he said. “I still want to see some more economic data that gives me a comfort level that this recovery in the U.S. has finally got some legs.”

He also wants to see if Europe has in fact turned the corner toward economic growth.

“When that second gear kicks in – if the U.S. continues its current growth pattern and Europe can turn the corner and show some stability and growth going forward -- I really like the PGMs. When you add China with that middle class coming up with money to buy cars, the demand for PGMs relative to supply make them a much, much better place to have your money on a hard-metals asset basis than gold or silver over the next two years.”

By Allen Sykora of Kitco News; asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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