Platinum's Discount Won't Last Long

02/18/2013 9:45 am EST


Jeb Handwerger


Look for platinum to break away from gold, reaching its historical levels, as supply constraints and increasing demand create a real shortage, writes Jeb Handwerger of

Platinum is breaking out compared to gold, as South Africa, which supplies three quarters of world production, continues to struggle with labor issues and possible nationalization. Look for a major breakout of the platinum to gold ratio at 104.

Platinum is about to break into new 52-week highs, as demand increases due to the economic rebound in Asia, while at the same time, supply is under major pressure.

The majority of production comes from questionable mining jurisdictions. The world's largest producer of platinum, Anglo American Platinum (AMS), reported a major loss for 2012 and warned of a potential supply shortfall, as labor protests and nationalization fears continue to increase.

South Africa has become increasingly volatile, right when demand for platinum is picking up due to increased sales for new automobiles. A supply shortfall in platinum and a potential price spike could happen in 2013, as a major deficit in platinum group metals (PGM’s) could be developing.

I also forecast that platinum's discount to gold will not last long, as we were in the beginning of a major rebound in the Far East and a risk-on rally in housing and financial stocks.

This could boost inflationary forces for monetary metals such as platinum and silver, which also has a rising industrial use. When platinum and silver begin outperforming gold—as they have been doing recently—this may forecast that inflationary forces are beginning to take effect. This may also be bullish for the undervalued junior miners who perform better during risk-on cycles.

Platinum underperformed gold as a safe haven in 2011 and 2012, as a slowing economy and deflationary forces in Europe and the US favored the yellow metal as a risk-off investment vehicle. However, that trend may be changing quickly, as investors realize that:

  • the central banks have used massive monetary weapons to fight deflation
  • that we are starting an inflationary cycle, evidenced in the rebound in the most toxic sectors, which the government has been bailing out since 2008.

Platinum’s recent discount to gold was extremely unusual. It happened in 2008, and then at the end of 1996. Each time, this represented a great buying opportunity, as platinum supply is extremely tight and historically averages double the price of gold.

Of course, in 2011 and 2012 the debt crisis in Europe and the US led to a major safe-haven rally where gold outperformed platinum and silver. I wrote a few months ago that as soon as the strikes hit South Africa, we may be near the bottom.

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Over 90% of the world platinum supply comes from Zimbabwe, Russia, and South Africa—not mining-friendly jurisdictions. This pressure on supply, combined with a robust recovery in China manufacturing, may be the factor for the outperformance of platinum.

The cost of mining platinum in South Africa is marginally profitable at these prices, as the costs are quite expensive, due to South Africa having the deepest and most dangerous mines in the world. The fundamentals for platinum appear to be stronger than that of gold, due to the great potential for lower mine supply from South Africa in 2013.

In conclusion, the price of platinum may be turning higher. Do not be surprised for major miners to cut back on platinum investments in South Africa. And look for additional secure supply in North America, where there are undervalued opportunities.

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