Why You Should Consider Investing in PlatinumBy Trevor Raymond, Director of Research, World Platinum Investment Council
Published on June 1, 2017
While many investors today are familiar with the investment merits of owning gold, far fewer are aware of the strong investment case for platinum, a precious metal 30 times rarer than gold.
Historically, it has been argued that investors should hold a percentage of precious metals in their portfolio to serve as both a “safe-haven” asset and a hedge against inflation. Clearly, gold is an excellent investment metal in this respect. However, many now refer to platinum as being similar to gold, but with stronger supply and demand fundamentals. Platinum has been shown to improve the effectiveness of precious metals allocations by acting as a long-term portfolio diversifier. It is significant to note that if investors in gold had included even 5% of platinum in their portfolios, their risk-adjusted returns would have been higher over the past 30 years.
Key recent platinum insights highlight why investing in platinum may suit the risk, portfolio or value requirements of both professional and retail investors.
Platinum’s unique credentials — precious, industrial and green — combined with the active promotion of jewellery and investment continue to drive growth in global demand in the face of constrained global supply. The platinum price is currently well below recent averages and remains at a steep discount to gold. Moreover, it is now easier for private investors to obtain platinum exposure through readily and easily accessible exchange traded funds (ETFs), fully backed by vaulted physical good delivery bars.
Platinum is one of the rarest precious metals in the world. All the platinum ever produced would only cover your ankles in an Olympic-sized swimming pool. In contrast, all the gold ever produced would fill three such pools!
It has distinctive qualities that make it highly valued across a number of diverse demand segments. While platinum is best known for being the premier choice for fine jewellery, it is also a unique investment asset, and its remarkable physical and catalytic properties sees it used in myriad industrial applications.
Platinum is dense, malleable and ductile. It can be hammered or pressed into a shape without cracking or breaking, and stretched without losing its toughness. One gram of platinum can be stretched into a wire over a mile long! Moreover, it is heavy – a six-inch cube of platinum weighs as much as the average human being.
Platinum offers a unique investment opportunity, with strong merits to consider:
- Platinum has traditionally traded at a healthy premium to gold. There have only been four occasions during the last 40 years where platinum has been priced at a discount to gold for a sustained period. In all these cases, the price markedly recovered in the following years.
- Platinum’s precious underpin offers a low-risk entry for investors looking to buy into this investment asset.
- Platinum has a low correlation to the performance of traditional assets and performs well during periods of economic recovery. An allocation to platinum improves the risk-adjusted returns of a portfolio, including when gold is present.
- The widespread application of platinum in new technologies and in the development of future technologies and the associated demand growth is currently not reflected in its price.
Platinum has proved itself to be a well-performing investment over the long-term, satisfying the needs of private investors. It is best suited to medium to long-term investors who can withstand short-term volatility and who fully appreciate the precious underpin coupled with its industrial premium based on its value-in-use in industrial applications and supply demand deficits. Furthermore, platinum is well-suited to a thematic investment approach and is linked to global megatrends such as addressing climate change, increased access to healthcare and provision of clean water. Platinum’s role in these trends is not widely known.
Platinum’s strong investment performance in the past (Figure 1) was driven by its rarity, diversity of application, diversity in geographic consumption, constrained supply and effective demand stimulation. This has resulted in deficits in each of the last five years. These drivers remain in place today.
Despite clearly supportive fundamentals, the price of platinum currently sits at historically low levels. We believe that this is because the metal has been oversold, while platinum’s medium to long-term potential is not reflected in its price. With five more deficit years expected, this creates an attractive opportunity for the discerning investor.
Platinum’s supply comes from two main sources: (i) primary mining output, and (ii) recycling supply, primarily from the auto catalyst and jewellery sectors (Figure 2).
The main drivers of primary mining output in the long term are the amount of capital allocated to platinum mining, which is a function of the producer incentive price (the price of the basket of metals produced through the platinum mining process), compared to the marginal costs of mining.
The majority of platinum’s demand comes from four sectors (Figure 3).
Automotive – Platinum’s largest single use is in automotive exhaust systems, where it plays a unique role in controlling harmful vehicle emissions. Increasing emerging market demand for autos, coupled with stricter global emission standards, indicate strong long-term growth characteristics from this segment.
Industrial – Platinum is used in a variety of industrial applications ranging from biomedical devices to the manufacturing of glass fibre, liquid crystal display glass, and jet engine blades. Growth in industrial usage over the next few years will remain largely driven by global economic growth. For example, platinum is used in the manufacturing of nitric acid for fertiliser, so as the global demand for food increases, the need for platinum will increase.
Jewellery – The jewellery market is the second biggest user of platinum, accounting for about one-third of global demand. Platinum has established itself as the world’s premier jewellery metal, supported by successful promotion in centres of growing population such as China and India.
Investment – ETFs, accumulation plans and bar and coin investment, particularly in Asia, have continued to develop and grow in recent years. The World Platinum Investment Council (WPIC) is supporting the long-term demand for platinum by presenting the investment case for platinum to investors around the world, and working with a growing range of partners to both stimulate and satisfy investment demand. This enhances market efficiency, increases product and distribution channel availability and addresses the needs of a growing investor base.
Platinum has performed well against other asset classes over a long period and has proven itself to be a good store of value with a strong set of diversifying properties. These are interesting times for the platinum market, but when we put the sources of supply and demand together, a clear picture emerges.
Global primary platinum production is in decline, with key supplier South Africa – which accounts for over 70% of global mine supply – impacted by an increasing depth of operations, aging mine profiles and rising expenses in real terms. Indeed, significantly reduced capital investment in platinum mining strongly suggests that primary supply will continue to decline through 2020.
Meanwhile, demand has outstripped supply every year since 2012, and it is expected to continue doing so over the next five years, ensuring that the global platinum market will remain in deficit until 2021. This imbalance should result in market prices that more accurately reflect its fundamental value.
In our view, therefore, platinum is now at an inflexion point. It is currently owned by far fewer investors than those who could achieve enhanced returns by including it in their portfolios. Additionally, platinum’s continued diversity and adaptability ensures it will be in demand for generations to come.
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