Why is Platinum Cheaper Than Gold?

On Monday, spot gold was sitting at about $1,182.40 per ounce, while platinum was last over $60 lower, at $1,116 per ounce. The switch happened around mid-January, and the price gap has continued to widen since then.

Certainly, factors such as lower platinum imports into China have weighed on the metal’s price — according to the Financial Post, imports fell to their lowest level since 2009 in February. However, in conversation with Resource Investing News, William Tankard, director of precious metals and mining at Thomson Reuters (TSX:TRI,NYSE:TRI), pointed first to supply-side factors that are driving platinum’s fall.

“I think that a lot of what we’re seeing now is almost pent up from the period preceding the resolution of the AMCU strike,” he said. He noted that the South African mineworkers’ strike went on for five months in 2014, and during that time roughly 60 percent of South African mine supply was not in operation. However, when a settlement announcement was made last June, there was a “closing of the gap” that took place between the platinum and gold prices.

According to Tankard, that change was happening when mining companies affected by the strike — such as Anglo American Platinum (OTCMKTS:AGPPY,LSE:AAL), Lonmin (LSE:LMI) and Impala Platinum Holdings (OTCMKTS:IMPUY) — were announcing that they were getting back on track and that production ramp ups would be faster than those following 2012 strikes.

“Too much emphasis could be made as to what actually triggered the switch itself, but I think that by early in 2015 … producers were all in the position of having announced that the ramp ups are complete, that they are back to business as usual and that wherever they can, they are now focusing on maintaining the projects that had previously been on the books and indicating that they are not looking to cut production.”

Platinum is still in deficit, but Tankard noted that the deficit is shrinking. “We saw deep deficit markets in 2014, and we’re expecting a marginal deficit in 2015, but basically if the producers do not cut, that just serves to undermine the long-term fundamentals,” he stated. Based on that behavior, he suggested one might infer that platinum producers could “produce themselves out of a deficit market into a surplus market” over the next 12 months. No doubt, that’s had an effect on investor sentiment.

“I think what you have is probably a certain amount of positioning around investors taking the view that if the supply side is not going to cut, where is the industry going to end up?” Tankard said. “So now there is probably quite a cautious attitude towards platinum, which I would argue supports the fact that we are now seeing it trade at a discount of $50 to $60 to gold.”

That doesn’t paint a pretty picture for platinum. However, Tankard also noted that he doesn’t expect the current situation to last forever. “I think it’s worth making the point that this price relationship is not normal,” he stated. “Yes, it has been seen before, but it’s not the typical way round for the two metals; long term, we would not expect the price relationship to remain such that platinum is trading at a discount to gold.”

Back at the start of the month, Tankard told Platinum Investing News he expects the platinum price to average around $1,300 to $1,350 per ounce this year. Certainly, investors in the platinum space will be hoping that the metal moves closer to that forecast.

Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.

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