Platinum is on Fire, Will Gold Follow?

Platinum has been so hot lately, and has passed 2,100 (per oz) mark this morning (2/19). Palladium has also been rising in sympathy, now pushing the key $500 (per oz) level. Both platinum and palladium are 2 of the 6 metals in the so-called PGM (platinum group metals) area. Besides fabrication mainly for jewelry use, platinum and palladium have important industry implication, mainly in auto industry, and they have been used as oxidation catalyst in catalytic converters to treat automobile exhaust emissions. Since PGM is also regarded as part of the precious metal group, it would be meaningful to compare their return to gold and silver. In general, platinum is very much in sync with gold and silver from long term perspective. Gold has increased almost 4 folds from the 2001 bottom at $250, and silver has over 3 times from the 2003 bottom of $5, while platinum has risen from under $400 to over $2,100 today, over 5 times. It can be said that platinum has actually performed better than gold and silver (setting aside the less known rhodium which has performed unbelievably over 2000% for the last 7 years). On the palladium side, the story is very different. In 2001, palladium has actually reached $1,100 peak which has yet to be overcome. Even today at around $500, it is still over 50% lower than 2001 top. But I feel the 2001 is probably a hype at that time due to the sudden regulation change for emission control which skyrocketed the demand of catalytic converters for the auto industry. With the subsequent downturn and troubles in the auto industry during the past several years, resulting less demand, plus the possible stockpiling of excessive supplies of catalytic converters, palladium seems to have hard time to deliver a return like platinum. However, it is very likely that, with platinum soaring and making new all-time highs on nearly a daily basis, the commercial and investment wisdom of palladium substitution again looms. The catalyst for current daily wild increase of platinum is probably due to the energy crisis and power shortage of South Africa mines. As many studies show, the energy crisis in South Africa may well hamper platinum and palladium production for many, many months...if not years. Approximately 35% of the world's palladium, and 70% of the platinum production comes from South Africa. The two largest platinum producers in the World are both South Africa companies: the largest platinum producer: Anglo Platinum (JSE:AMS); 2nd largest: Impala Platinum (JSE:IMP; OTCPK:IMPUY). Impala is actually traded at the OTC pink sheet here in the US. Now with the price differential between platinum and palladium so large, in favor of palladium, companies such as North American Palladium (PAL) and Stillwater Mining (SWC) no doubt will certainly galvanize the attention of many Institutional Investors such as mutual funds and hedge funds. You have seen this morning (2/19) PAL has reaped double digit return and SWC over 8%. What is amazing is that today's return is built on top of an already spectacular rise going on during the last couple weeks. If you look at a PAL 8 year chart, it shows PAL share price rose to around $12 four times during last 4 years (2001, 2004, 2006 & last year). Of course, past performance doesn't guarantee that PAL will return to the same level, but if it does, even at today's $8 price it might represent a 50% share price appreciation, if both platinum and palladium can remain high in the future. This is possible due to many factors, probably the most relevant one is the lingering of power shortage in South Africa mentioned above. This will impact platinum more than palladium since over 2/3 of platinum is from there vs. only 1/3 of palladium in the globe, but it will continue to motivate industrial consumer substitution toward palladium. The latest development in PGM is also bullish for gold and silver. Now we see the whole precious metals category rising together from long term perspective, and they are in sync with each other and reinforcing each other. However, I am still more bullish on gold, since both platinum and palladium are more driven by industrial usage and fabrication demand, which might cap the potential future upside if we are looking at a very long time horizon, even their short term performance could be far better than gold. However, only gold commands the monetary function which is still yet to be fully revealed, and all the other precious metals are lack of. What has happened to PGM might happen to gold, silver and many PM mining companies including juniors in the near future too. __________________ By Thomas Tan, CFA : See his profile at Vestopia