Platinum is a precious metal with a light gray appearance. It is one of the rarest elements on Earth. South Africa is the main source of platinum, accounting for over 75% of the world’s production. In the automotive manufacturing industry, platinum is used mainly for catalytic converters as it’s quite resistance to high temperature and corrosion. Platinum may also be used for electrodes and other electrical contacts as it has a high level of electrical conductivity. Only a few hundred tons of platinum are produced annually, which can be traded at a premium to gold, but not always.
Many investors in the precious metals sector have been disappointed with the significant decline in prices this year. Precious metals mining stocks have fared even worse than the commodities, with massive drops in their share prices.
An area where many investors make a mistake is in portfolio diversification. I’ve mentioned this many times in the past, but it bears repeating: never place all your money in one company or asset class.
While the precious metals index has declined, not all of the components have had the same performance or even the same level of fundamental developments. While gold is down 18% this year, and silver has dropped by 26%, platinum is only down 5.3%, and palladium is up 4.7%.
As I’ve mentioned in a previous article, investors should clearly look at adding platinum and palladium to their well-diversified portfolios if they are interested in having some exposure to the precious metals sector. The reason is that demand for both platinum and palladium is set to increase from industrial use. Investors should diversify part of their portfolios away from the traditional precious metals of silver and gold and into both platinum and palladium if they still wanted exposure to this sector.
Note that I’m referring to exposure to the precious metals sector directly through the commodities themselves, not the mining stocks for platinum and palladium. This is because the vast majority of platinum mining stocks are located in South Africa, and much of the platinum supply comes from Russia. Mining stocks in these precious metals are facing increasing costs, significant labor problems including strikes, and potentially stricter regulations.
Precious metals mining … Read More
The U.S. economy is certainly not running at 100% capacity, but one sector that is operating at levels not seen since before the financial crisis is the automotive industry. In March, automotive sales increased substantially to an annualized rate of 15.3 million vehicles per year, compared to 14.1 million vehicles this time last year. (Source: Bennett, J., “March U.S. New Car Sales Jump,” Wall Street Journal, April 2, 2013.)
American carmakers contributed with substantial increases, including General Motors Company (NYSE/GM), reporting a 6.4% year-over-year increase in March, and Ford Motor Company (NYSE/F), reporting a 5.7% year-over-year increase in March.
Two derivatives of the strong automotive sector are the precious metals platinum and palladium. Generally speaking, platinum is used more for diesel engines, while palladium is used more often in gasoline engines. The increase in gasoline engines should, on the margin, increase demand for palladium versus platinum. With European vehicle sales slow, this should reduce demand for diesel engines.
One mistake many new investors make is investing with an all-or-nothing mentality. For example, an investor might be bullish on all precious metals, irrespective of the fact that certain commodities might be better investments than others in the precious metals sector.
Recently, the Chairman and CEO of Stillwater Mining Company (NYSE/SWC), Francis McAllister, stated that he believes it is highly probable that palladium will increase in price relative to platinum. Currently, palladium trades at approximately 48% of the price of platinum, up from 30% in 2003. McAllister believes palladium will rise to 65% of the value of platinum. (Source: Hill, L., “Stillwater CEO Sees Palladium Outperforming Platinum,” Bloomberg, March 21, 2013, last … Read More
Many investors in gold mining stocks have been disappointed over the past few months, as their shares have languished. Since November’s low, gold has gone down slightly, currently trading at $1,665 an ounce. Obviously, mining stocks need the commodity to increase in price for their shares to appreciate.
However, there are two precious metals that have seen a spectacular rise in prices since November: platinum and palladium.
Platinum was trading at approximately $1,545 in early November; now it’s just less than $1,700 an ounce, up 10%. Palladium has outperformed these other precious metals, as it was trading at $590.00 an ounce in early November, and it’s now at $750.00, up more than 28%!
When it comes to investing in mining stocks involved in extracting precious metals, it’s crucial to understand the underlying fundamentals of the commodity market.
Obviously, the two main determinants of price for precious metals are supply and demand. The precious metals of palladium and platinum are heavily used in the construction of catalytic converters. As many of you are aware, last year was an extremely strong year for car sales in many parts of the world. This is expected to continue through 2013.
While high-priced precious metals are causing a decline in jewelry demand, the large demand for automobile sales appears to be more than enough to compensate for any slack in the market. With interest rates so low in America, I don’t see a significant move up over the next six to 10 months, and this will continue to drive strong automobile sales in 2013.
According to automotive market research provider LMC Automotive Limited, in 2012, … Read More
While many people have been looking to gold over the last few years, another precious metal that may also benefit is platinum. As many people know, supply and demand are key when it comes to the pricing of any precious metals, including platinum. Mining stocks that are producing platinum in excess of demand will put downward pressure on prices. Conversely, if demand was stable for platinum and mining stocks were unable to fulfill demand, the deficit would be good news for prices.
An interesting report by Johnson Matthey stated that it’s highly likely that the platinum market will be in a deficit. Such a scenario would certainly be bullish for platinum mining stocks, which aren’t affected by any operational issues. Jonathan Butler, the author of the report, states that a significant reduction in the supply of platinum and the recycling of catalytic converters is going to move the platinum market into a deficit. (Source: “Platinum Market Forecast to be in Deficit in 2012,” Platinum Today, November 13, 2012, Johnson Matthey, last accessed November16, 2012.)
The report cites severe disruptions in South African mining as one cause, among others, of the shortfall in platinum; these disruptions will result in a 10% decline in worldwide platinum supplies while demand remains firm.
South Africa, specifically, will have a 12% decrease in platinum extracted, the lowest 11 years, according to the report.
This is one major issue that people must be aware of when investing in mining stocks. Regional disruptions due to strikes, political instability, and other operational problems are inherent in all mining stocks, not just those involved in the platinum industry.
When … Read More
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