The price of platinum has increased enormously since the start of August, and at the time of this writing, we're seeing a price of about $1700 an ounce, up from just under $1400. That's a 21 percent increase in just six weeks. The price of platinum ETFs naturally follows.
For once, the reason is clear: It's the recent troubles in the mining sector in South Africa. The violence has triggered a lot of uncertainty about the future of the platinum miners, and a considerable reduction of the supply of the precious metal is expected if the conflict continues or escalates.
In addition, the recent German legal approval of the measures taken to help solve the European crisis has been well received by the markets, and gives some hope that the demand of platinum for use in catalytic converters in cars may increase as European consumers buy more new cars.
It is, as always, hard to predict the future of the price of platinum, but the recent hike is a reminder of just how vital South Africa is to the supply side. And it seems likely that some unrest among miners will continue for the foreseeable future, which is good news for those who bought a platinum ETF this summer.
It looks like platinum is continuing the slide that started in February, and now we're seeing it in the 1300s. There's no sign that it's going to pick up anytime soon, although a basic technical analysis indicates that there's some support around the 1380 mark. But platinum has fallen through many support levels during the last few months.
The reason appears to be a falling demand for platinum jewelry in the Asian consumer markets along with the continuing financial troubles globally, not least in Europe. That means that platinum for use in catalytic converters is also moving slow.
In addition, we have the continuous problem of the platinum stockpile sloshing around in the global markets, acting as an effective buffer against any upward movement.
It's illustrative for the platinum price that gold now has a 16 percent premium on it - that hasn't happened since 1987. As we know, gold trading at a higher price than platinum is rare and indicates a weak economy. Normally, platinum costs more per ounce than gold does.
How does it look going forward? Auto sales are projected to remain low for months yet, especially in Europe, where there's no end in sight for the crisis. When Asians will pick up their interest in platinum jewelry is anyone's guess.
So, it's not looking good for this year. It seems the best we can hope for is that the price will stop falling, stabilize over a month or so and then slowly pick up. At some point, there has to be a balance between supply and demand, and the low price we're seeing is unsustainable to many platinum miners. No new investments means that when the price starts to rise, it may go up fast. This could be a good time to get in.
But that's an optimistic projection. If the price of platinum keeps falling, it's not out of the question that we'll see it in three figures before the year is out. A dabble in an inverse ETF may start to look interesting...
For owners of a platinum ETF, the price development of the metal has not been a source for joy this far into 2012. Platinum started this year well, and as we predicted, the price shot up to over $1700 in February. But after that, it has been caught in a downward trend that doesn't look too good right now and will likely continue before it flattens out. The series of lower peaks indicates that the market is losing faith in the precious metal.
It seems financial instability, in Europe particularly, and surplus metal in the global markets is to blame for many analysts cutting their forecasts for the average price of platinum this year. An average only a little over $1600 an ounce was not what we had in mind at the beginning of the year.
European car manufacturers are still subdued because of the ongoing Euro crisis, and demand less platinum then they otherwise would. It's anyone's guess when that situation may show improvement.
On the other hand, there's demand for platinum from investors, as the interest for investing in precious metals remains high. Gold is popular, as always, but some of the enthusiasm is expected to spill over into platinum as well.
In 2011, there was a global production surplus of platinum of about 12 percent, which is also due to a supply increase of five percent. Even so, the average price for the year was an all-time high. There's expected to be a slightly larger surplus in the platinum production this year.
We should not expect the price of platinum to bounce back anytime soon, as there seems to be a stockpile of the metal sloshing around in the global markets. During the past few years, a surplus of more than 4 million ounces has accumulated in the market, considerably dampening the price so far this year. The situation is expected to continue for at least a couple of years. The proper response to this is a reduction on production, but it seems one is unlikely to follow for a while.
For comparison, if production of platinum were to halt entirely, this stockpile would cover the global demand for almost a year.
The stockpile and recycled platinum will act as a buffer against an increase in the price, even though the political unrest in southern Africa is threatening the supply side.
We should be prepared for the platinum price development to remain moderate for the next two or three years.
After that, it seems we might be in for a nice development, as the stockpile gradually decreases and production slows. The mining companies have no intention of investing in higher production with prices as low as around $1600 an ounce, and that may help the price increase sharply a few years from now.
It seems that for the time being, investing in a platinum ETF is only for the long term - or for the adventurous.
Owners of a platinum ETF have every reason to rejoice. 2012 has started just as we suggested on this site about a mont ago, and has seen a steady rise since the beginning of the year. That's about a 20% increase in the platinum price since January 1st to the start of February 2012.
As we noted before, the head and shoulder formation at around $1550 had to be broken on high volume for the upwards trend to be established. That happened around January 25th, when we see a classic testing of the resistance at $1550, a tiny dip and a strong increase to over $1600. The trend is looking very strong now.
The next resistance is around $1650, and may take a little more to break through than this lighter resistance that was just thrown aside. If that succeeds, there's no great resistance under $1900. So there's a lot of profit to be gotten from a platinum ETF before we approach those levels.
And after that? With the supply side weak and the demand growing, we would not be surprised to see an all-time high before 2012 is out. The current trend certainly seems to indicate the possibility.
Update May 2012: But the situation a few months later is less rosy. Click here to see the details.
Platinum may be one of the best portfolio bets of 2012.
2011 was a special year with several new platinum ETFs being launched, even though the price of platinum took a plunge, and dived below the price of gold.
It is now easier than ever to invest in platinum by buying a platinum ETF, or to bet against the platinum price by buying an inverse ETN or even one that is leveraged. The future development of the platinum price is thus of great interest.
The platinum price is very volatile, mainly due to the fact that the metal has many industrial applications. While precious metals such as gold tend to increase in price during economical downturns, the platinum price tends to fall with the stock markets, and buying platinum is thus not a way to hedge against recession.
Even so, due to the scarcity of the metal, platinum is usually valued higher than gold. It's very rare that the ratio of platinum vs gold falls below 1, but that has been the case for months as of this writing (January 2012). Certainly the gold price has shot up to very high levels, but the discrepancy is too great to account for by assuming that gold is overvalued. Most precious metal analysts agree that platinum is undervalued – in other words, cheap. It is currently valued just a little over its price of production, while gold is valued at 6 times its cost of production. We can expect to see a surge in the platinum price in 2012.
The platinum price factors
One major driving factor for the platinum price in 2012 will be the auto industry. US automakers are seeing greater demand than they have since 2007, and sales figures are up. This recovery is expected to continue in 2012.
The Russian Norilsk group, a major manufacturer of platinum, predicts a 5% increase in demand for this year. That is more than other industrial metals are expected to increase. Some analysts estimate that automakers will use around $7 billion on platinum for catalytic converters this year, which will be the most since 2007.
The growing demand for fuel cell technology will also contribute to higher prices for platinum and palladium.
Other industrial applications, such as electronics, are also predicted to increase demand for platinum in 2012.
Rising demand for platinum jewelry, especially in China, will likely also account for a surge in the platinum price. Analysts estimate that the sales of platinum jewelry will rise by 40% this year.
Platinum ETFs also stockpile platinum, and held 7% more of the metal at the end of 2011 than at the beginning of the same year.
At the same time, the supply of platinum is constrained. Platinum miners see no increase in production capacity until 2020 at the earliest. Producers are even warning that output may fall, due to looming strikes in South Africa and other troubles in Russia.
On the other hand, economic recovery in the Western economies has been sluggish, and as more cars are scrapped, access to recycled platinum will increase. At the same time, due to the low supply, manufacturers of cars are increasingly using palladium instead of platinum in catalytic converters.
According to Yahoo! Finance, platinum and palladium “could be the best portfolio bet in 2012”. Buying a platinum ETF is the easiest way to profit from a little dabble in the precious metal.
Update, May 2012: Or not...
Technical analysis: The platinum price developed a pronounced head and shoulder pattern toward the end of 2011. This set a strong resistance around $1550 per ounce of platinum. The price must likely break through that resistance with high volume if any substantial increase in price is going to last.