By Michelle Smith — Exclusive to Platinum Investing News
For the past six months, gold prices have managed to stay above platinum prices. This week platinum continued making daily gains, allowing the metal’s price to snatch back its leading position. On Tuesday, at the close of New York markets, the spot price for platinum was $1,687 while gold was only $1,675.
The timing of platinum’s rise over gold indicates how different the environments in which these two metals thrive are.
Six months ago we witnessed an abnormal shift that allowed an ounce of gold to purchase more than one ounce of platinum. This deviation from the norm came at a time of extremely elevated economic concern. The bulk of this concern was a result of issues in the Eurozone; the region hosts key markets for platinum due to the popularity of diesel engines. At that moment, investors putting their money into metals were largely seeking safety, making gold the most attractive option.
The hysteria surrounding Greek debt has deflated, and there is increasingly positive economic data coming from the US, including positive auto sales figures and an encouraging market outlook. These factors have led to platinum outperforming gold.
To see the correlation between gold prices and economic turmoil, investors can look at the dramatic leap day fall in gold prices that followed testimony from Federal Reserve Chairman Ben Bernanke, who failed to offer details of another round of quantitative easing (QE). Gold suffered again on Tuesday when the Federal Open Market Committee (FOMC) meeting also failed to produce an announcement of new QE.
Platinum, which tends to have a closer association with economic growth and fitness, has not experienced the same adverse effects from the lack of new liquidity measures in the US.
During the sell-off following Bernanke’s leap day testimony, platinum held up well compared to gold. The latest data shows that net speculative length of platinum on the NYMEX fell only about 70,000 ounces whereas net speculative length of gold on the COMEX dropped 159.2 tons. Open interest for platinum remained well above the 2011 average while gold open interest sank below last year’s average.
Platinum’s positive performance is also attributed to supply concerns. As the bulk of the metal comes from South Africa, labor disputes and safety stoppages at the nation’s mines have negatively impacted production at a time when demand is showing signs of improvement.
Impala Platinum (OTC Pink:IMPUY,LSE:IPLA,ADR:IMPUY) is a prime example. The company reported that it lost some 33,000 ounces of platinum due to safety stoppages for the six months ended December 31, 2011.
Impala is now attempting to get back on track following a labor strike that lasted over six weeks, and as of February 28 resulted in 100,000 ounces in lost production, equivalent to about two billion rands of lost revenue. As a result of these disruptions, the company’s production targets are likely to be jeopardized, and it has reportedly warned customers that April deliveries may be cut in half.
HSBC is forecasting a platinum supply deficit for this year, questioning whether its projected 11,000 ounce increase in production will be enough to compensate for the positive industrial and investment demand that it also foresees. HSBC reiterated its forecast of $1,775 as the average platinum price for 2012.
Impact of higher platinum prices
By reclaiming its leading price position, platinum does lose a marketing point among investors – the appeal of being available at a discount to gold.
Investors should also be cognizant of the widespread trend of headline trading. While focus has shifted from the Eurozone crisis, the issues there have not been resolved. Forthcoming negative news about the region is likely to push platinum prices around, so preparation for volatility is advised. Those who are playing the market long may want to consider any upcoming dips as buying opportunities.
Liberum Capital analyst Dominic O’Kane described platinum as the first mining sector to fall below the marginal cost of production. South African platinum companies are struggling with rapidly escalating costs at a time when they also need to make investments in future production. Rising platinum prices have been lifting their share prices so a sustained price rebound should be greatly appreciated.
Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.