đź’Ť Your Guide To Investing In Platinum, A Metal Rarer Than Gold
Brief Background
Platinum is one of the rarest metals in the world, even more so than gold. In fact, all of the platinum ever produced would easily fit in your living room. As a comparison, all of the gold ever produced would fill three Olympic-sized swimming pools. Platinum is one of 6 in the platinum group metals (PGMs), all of which share similar characteristics and tend to be together in the same mineral deposits.
What Can It Do For You
🛡️ Protection. While platinum may not be as sexy as gold or silver, it’s still considered a safe haven asset. In fact, one study found that platinum, at times, can even be a stronger “haven” than gold. Diversifying your portfolio from stocks and bonds, and even from gold and silver, can reduce risk since you’re not “putting all your eggs in one basket”. As a reminder, diversification is a way of preserving wealth in times of instability, inflation and market volatility.
💰 Profit. Similar to silver, it has a smaller liquid market (less people who want to buy/sell it) than gold, which means it’s more susceptible to price swings. The majority of platinum demand is from industry, especially the auto industry, accounting for ~65% of total demand. So, investing in platinum is basically betting on the growth of these industries, assuming the other factors are stable. The main advantage that platinum has over gold is that it’s currently more affordable, even though it was historically more expensive.
What Affects Platinum Prices
There are several key factors that are involved in moving the price of platinum:
- 🇿🇦 South African Economy & Supply. South Africa has been responsible for producing ~75% of the world’s platinum supply. As a developing country, its economy can be unstable and unpredictable. Mine labour strikes, political instability & unrest, & other such events can all have an effect on the world’s supply of platinum.
- 🏠Industrial Demand (Especially the Auto Industry). Because industrial demand makes up ~57–69% of total demand (with the automotive industry making up ~36–43% alone), industrial demand can have a big impact on its price. Platinum tends to perform well when the auto industry does well, since demand increases, and vice versa when the industry struggles. The thing is, when platinum gets too expensive, suppliers are more likely to substitute it out for cheaper metals in the PGM family, which can then lower demand, and therefore its price, and vice versa when platinum is cheap relative to the other PGM metals.
- 🌱 Environmental Policies. More regulation towards emission standards and air quality for vehicles can also have an impact on prices. For example, the Volkswagen emissions scandal basically led to a fall in diesel car sales, which meant that there was a lot of platinum supply left unused, while there was a shortage of palladium. Basically, platinum prices fell while palladium prices grew.
- 🚗 Battery Vs. Fuel Cell Electric Vehicles. Because most of the demand is from the auto industry, developments and demand for battery electric vehicles can potentially impact prices. This is because battery electric vehicles don’t use platinum at all since they don’t release emissions. Fuel cell electric vehicles (using hydrogen as fuel rather than a battery), however, use twice as much platinum than normal engine vehicles (see more here). Basically, watch for developments in both.
Where Is Demand Coming From?
There are three main areas that drive demand:
- 💎 Jewellery. Not only is platinum shiny, its low reactivity means it’s more resistant to tarnishing than silver. Jewellery makes up roughly ~26–35% of total demand. China represents most of this market. Platinum engagements rings are popular in Japan and in the US.
- 🏠Industry & Technology. Platinum’s unique properties (low reactivity, biocompatibility, etc.) means it’s used in a variety of tech and manufacturing industries. The auto industry makes up ~36–43% of total demand, being used as catalytic converters to reduce toxic emissions from cars with engines, while other industrial demand makes up ~21–26%, being used in medical devices (used in pacemakers & some surgical instruments), chemicals, petroleum, electricals, and glass.
- 💸 Private Investments. Investments account for ~0–15% of total demand. These include physical platinum bullion bars, coins, and ETFs, funds and other similar products that invest in platinum.
A recent report from the World Platinum Investment Council forecast for 2020 as a percentage from last year: 13% decline in mine production, 14% decline in automotive industry, 5% decline in industrial demand, 15% decline in jewellery demand, and a 52% decline in investment demand.
The Case Against Platinum
Like other precious metals, platinum is not a productive asset. It doesn’t generate dividend payments and pays no interest, unlike stocks & bonds. Also, platinum price fluctuations are much more volatile than other precious metals because it has a smaller market with lower liquidity (less people trading), & since the value of platinum relies heavily on industrial demand, mainly from the auto industry. Any fluctuations in demand, & indeed, any disruptions with South African’s mining production, will be reflected in its price.
The Case For Platinum
Although platinum doesn’t provide dividends, it can offer speculative returns since it’s currently more affordable compared to the other precious metals. Supply is forecasted to decrease because of underinvestment in South Africa while demand for other industry applications has increased, suggesting good conditions for the long-term. Furthermore, platinum is still considered to be a safe haven asset, moving differently to stocks & bonds. It can even serve as a diversification tool against silver & gold.
Popular Ways To Invest In Platinum — Pros/Cons of Each
There are many ways in which you can buy/invest in platinum. If you are still unsure about how any of these work, refer back to our basics newsletter for more information. Here are some of the more popular methods:
- Physical Platinum (Bullion Bars & Coins). You can buy and directly hold physical platinum bullion bars and/or coins. There’s no doubt to the ownership of these assets, and is reliable. However, you may want to consider storing in a secure storage facility rather than at home. Further, you may be faced with several fees — the cost to convert raw platinum into finished bars and coins tends to be passed on to you, as well as commission fees for the broker acting as the middleman. Selling it may also prove to be an issue as the broker may buy it back at below market prices. Alternatively, there are government-owned mints (if not available, reputable online precious metals dealers) where you can physically and/or digitally buy physical platinum, with the option to store at their vaults for a fee.
- Platinum ETFs. Platinum-backed Exchange-Traded Funds are traded on stock exchanges, so they’re very easy to buy and sell. However, there are no assurances that you actually own the physical metal. You also probably won’t be able to take delivery of your platinum. Depending on which broker you go with, you may be charged with trading commissions. ETFs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Whichever ETF you choose, be aware of the fine print — the risks and costs.
- Platinum Stocks. These are shares of mining companies that produce platinum. There are no fees, apart from trading commissions depending on your broker. They don’t necessarily follow the price of platinum since company profits and stock market movements need to be taken into account. Additionally, many of the mining companies produce and mine a range of other metals, not just platinum. Because of all this, you’re exposed to a greater number of risks involving company profitability, exposure to price movements of other metals, etc. You may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what mines they have, the other metals they produce, and potential expansion plans.
- Platinum Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell platinum at a specified time in the future with an agreed-upon price. Because you are using a significant amount of borrowed money, even small price changes in platinum can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
Similar to the other precious metals, platinum can be an effective way to protect against inflation (when currencies fall in value) and diversification (even from the other precious metals as well) to reduce overall portfolio risk. Unlike the others, platinum, at the time of this writing, is currently much more affordable & can be more speculative because its price is driven heavily by industrial demand, especially from the auto industry.
🛡️ If you are considering adding platinum for protection/preservation purposes, you may want to consider doing dollar-cost averaging (regular investments over time) to build your platinum position so you can take advantage of the the times when prices are low.
💰 If you are considering adding platinum for speculation and profit, you may want to monitor the factors that affect platinum prices mentioned above, especially production levels & political climate in South Africa, as well as industrial demand, monitoring palladium use in catalytic converters as well as developments in electric vehicles, both battery and fuel cells. The World Platinum Investment Council provides more information on trends and data, releasing quarterly reports on everything to do with platinum. You may also want to consider performing some technical analysis on platinum’s price chart and to perhaps compare it with other metals to identify trends and patterns to help with your decision. At the time of this writing, one troy ounce of platinum (about 31.10 grams) costs US$923.50 while one troy ounce of palladium costs US$2,175.00.
As always, if you are unsure, check in with a professional financial advisor before making any moves.
Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.
