Should you invest in platinum?
Platinum is an investment you should consider for your portfolio. It’s best to look at the fundamentals and use technical analysis before investing, but if you do it right with proper risk management measures in place then there are many reasons why platinum can be a profitable investment.
Before we get into the fundamentals of platinum investment, let's take a look at what makes platinum so unique.
What is platinum?
Platinum is one of the world's most precious metals. It has been estimated that all available gold would only be enough to fill three Olympic-sized swimming pools, while platinum could cover your ankles in the same pool.
Platinum has a short history, but that doesn't stop it from being an exchangeable commodity. It is available in financial markets as bullion coins, bars, and ingots (or small pieces of metal).
Also, platinum products are 15-20 times smaller than gold. That's why platinum is typically sold at a substantial price premium to gold.
Platinum is used not only for jewelry production but also as an investment asset in various types of portfolios.
Platinums unique properties make it a sought-after metal. It is both rigid and ductile, which allows someone to hammer or squeeze it into shape without breaking the material.
Alloys made with platinum are often more durable than other metals because of this property. This makes platinum an ideal choice for jewelry items like rings that need to be small but resilient enough not to break when worn on fingers all day long
A gram of platinum can be stretched over a mile in a tube. Platinum is heavy, a six-inches of platinum cube weighs as much as an average person! That's why it is demanded by diverse segments of industries like automotive and jewelry.
What makes platinum so special?
Platinum is one of the rarest metals in the world. Its demand skyrockets as a result, and that will only increase due to its use in many industrial processes. Platinum has no substitute for those purposes.
It can't be replaced by any other metal which would lead you to believe in exponential growth over time. In addition, platinum investments are less risky than gold because there isn't an equal supply on earth; alloys with other elements like rhodium don't count!
Although more and more platinum mined every year, platinum supply is still far rarer than silver and gold. We know that about 90% of global platinum production comes from South Africa and Russia.
We have observed platinum production problems in these countries for various reasons. Besides platinum being in limited supply, it's an energy and capital-intensive task to mine and process.
The platinum market is developing in both manufacturing and investment fields, as it's an essential raw material for use on a multitude of products. Platinum can be found around 20% of all consumer goods, making it almost the perfect metal to invest in before those industry stocks skyrocket!
The metal's superb characteristics, such as high corrosion resistance and a remarkably high melting point are what make it so sought-after in many industries.
It will continue to drive global growth in the coming years, owing primarily to fertilizer production, which requires platinum. This is a critical point because food scarcity is becoming an increasingly serious global issue.
Platinum's performance is usually better than gold and silver during unstable economies. This makes it a good investment when other investments are struggling, but make sure to take into account the wider spreads that platinum has over major precious metals (gold & silver).
Gold and platinum are both affected by industrial production demand. However, since it is much more often used than gold, the price of Platinum is closely tied with economic growth.
Platinum is more volatile in nature than gold and silver. I believe it shouldn’t surprise anyone. Platinum has a much shorter history as a precious metal. It is also less liquid that makes it less secure than gold.
These are also the reasons why platinum is less mainstream in the precious metal world.
Platinum has proven to be a reliable investment despite its short-term volatility. Platinum's real value comes from it being an industrial metal and there are deficits in supply and demand, making platinum more valuable than gold or silver.
In the face of climate change, global health crises, and a rapid population growth rate, there is an increased need for Platinum.
It's not easy to find out what role it plays in these trends because its effect on them has been less studied than those of other precious metals like gold or silver.
Where is platinum demand sourced?
Most of the demand for platinum comes from four areas.
The single largest use of Platinum currently falls under automotive exhausts where it plays an exceptional role in regulating dangerous emissions generated by vehicles.
The demand is expected only to continue growing with more stringent global emission regulations imposed every year going forward worldwide.
Platinum's versatility is evident in the wide range of industrial manufacturing uses, from biological applications to glass fiber and jet engine blades.
Platinum has been found to be an important factor for increasing food availability as well. It can help protect crops against pests while also boosting their yield.
It will continue driving global growth over the next few years due mainly to fertilizer production which necessitates platinum. This is a very important point because food scarcity is becoming an increasingly important issue for the world.
The jewelry industry is the second-largest platinum consumer, representing around one-third of global demand.
Platinum has demonstrated itself as the world's leading jewelry metal, backed by good marketing in growing population centers like India and China.
In the past few years, ETFs, accumulation plans, and investment in bars and coins, especially in Asia, have continued to develop and expand.
The World Platinum Investment Council (WPIC) supports long-term platinum demand by presenting the investment case for platinum to investors around the world.
WPIC is working with a growing network of stakeholders to both inhibit and satisfy the demand for investment. This improves market efficiency, increases the availability of the product and distribution channel, and addresses the needs of a growing base of investors.
The widespread use of platinum in emerging innovations and in developing technological advancements and the associated growth in demand is not currently reflected in its price.
Where does platinum supply come from?
The supply of platinum derives from two major ways:
- Primary mining output.
- Recycling existing supply (mainly from the automotive catalyst and jewelry industries).
The primary drivers of long-term main mining output are the amount of funding apportioned to platinum mining, that is a mechanism of the producer incentive price (the price of the metal basket generated through the platinum mining) as compared to the marginal mining costs.
What does affect the price of Platinum?
1. Supply and demand
Owning 75% of the world's platinum resources, South Africa is a key player in the platinum industry, and conditions affecting this country's political and economic environment greatly impact the platinum industry. Strikes in South Africa's platinum mines, in particular, can dramatically decrease the world's platinum supply.
This condition can cause the price to increase significantly. If the supply is decreased and the demand is steady, the market would normalize by consolidating at a higher price where platinum demand is lowered enough to balance the existing supply.
2. The cost of production
The price of platinum is not just determined by the demand and supply, but also closely linked to its production costs.
How much does an ounce of platinum cost to produce? It is determined by the region, mine, and mining company, as well as the production efficiency, which varies over time. In South Africa, for example, socio-political changes have increased production costs.
As of September 2018, it costs about $1,110 per ounce in South Africa, which is the world's largest producer of mined platinum.
The mining company must invest in expensive exploratory drilling and extensive geochemical analysis, as well as buy an exploration license to be granted permission by the government.
They can't even start extracting platinum ore until they've established a site with all of their physical equipment. It's not just enough for them to pull metal from the ground.
The mine will eventually have to be rehabilitated back into its original condition before extraction began if production is complete, which guarantees that this job isn't going anywhere soon.
The mining industry has different ways of measuring the cost of producing platinum. The traditional method, cash costs, only focused on what was spent to extract and process ore at a mine site.
However in 2013 when the World Gold Council published guidance about all-in sustaining costs and all-in metrics for gold miners they noted that this concept included not just production operations but also “costs related to sustaining production.” All-in metrics include everything from exploration expenses upfront until closure.
Some analysts believe that these production costs act as a floor for prices in long-term markets.
According to their research, when market pressures cause the metal’s cost per ounce less than this amount (as it has been recently), producers would decrease output mainly because they are unable to break even at such low levels without decreasing quality standards or putting off investment plans until prices rebound again.
In some circumstances though, namely short-term ones where trends fluctuate rapidly due largely to consumer whims like fashion cycles the mechanism doesn't work so well because changes from one year's highs can be erased with another high six months later.
3. World Economy
When the economy takes a hit, investors will always turn to investing in precious metals because they are seen as more stable than stocks.
Platinum is not an exception since it is perceived to be a reserve metal that can be traded like gold and silver.
It cannot be printed by central banks which means there isn't any inflation associated with platinum unlike U.S dollars.
Platinum's strong performance from the late 1990s until the 2008 financial crisis was primarily driven by the metal's limited supply and wide range of applications.
Platinum reached an all-time high of $2,273 per troy ounce in March 2008. However, as the economy deteriorated, it lost more than 65% in a matter of months, falling to $774/t oz. in November 2008.
Therefore, the assumption that there is a direct correlation between the world economy and platinum prices doesn't make much sense.
4. Mining Locations
Platinum demand often influences this balance where the price would be higher or lower, whether there is more or less interest in it.
The truth that platinum is exchanged on the markets can also induce demand to be less receptive to price alterations in supply.
Price rise in itself can cause the demand of investors to rise, in the same way, that rising prices of other monetary instruments such as stocks can create extra momentum.
If investors believe the platinum price will grow they may buy platinum. Investor involvement may bring platinum prices to a higher equalization price than industry demand causes by itself.
5. Industrial Demand
Since most platinum is utilized for industrial and non-investment purposes, changes in this predominant demand may also impact the price.
Since the automobile industry uses over one-third of platinum, changes in that sector, where people purchase more or fewer cars, may greatly affect the platinum prices.
As we transition towards electric cars, which is predicted to occur in the near future, this will lessen the use of platinum, as platinum has been used in catalytic converters that are not needed by electric cars.
In contrast, countries like China, where only a tiny proportion of people currently have cars, continue to expand. We can expect this factor to drive up demand for cars and platinum in turn, at least for the period they use combustion engines.
However, Platinum has numerous other functions that some of which are projected to grow, such as their use by the healthcare industry. This use of platinum also seems promising to grow over the upcoming years that may increase platinum demand.
Platinum is so adaptable and reliable in so many manufacturing processes that we should assume that this market will continue forever. Even though we are already beginning to step away from its use in pollution control.
Our dependence on fossil fuels may one day recede significantly, and we're nowhere near that level, so a significant reduction in platinum demand in general or even from this particular usage is not expected in the immediate future.
5. Changes in use cases
We know which industries have a high demand for platinum today. However, there may be additional industries that require platinum, which could increase platinum demand and, as a result, platinum prices.
The opposite of this situation is also possible.
If a platinum-demanding industry shrinks or no longer requires platinum, platinum prices may fall.
For example, the rise of electric vehicles, as well as weaker demand for diesel engines that use platinum catalytic converters, may reduce platinum demand from the automotive industry.
We also know that platinum has pharmaceutical applications. If a newly developed treatment technique or drug necessitates more platinum for manufacture, the price of platinum may rise.
Please keep in mind that what we've said here are just assumptions meant to give you an idea of how the platinum price changes in response to changing conditions. Nobody knows or can effectively estimate all of these factors because we don't know all of the industries and use cases that could benefit from platinum.
Are platinum and gold prices correlated?
It is hard and maybe deceptive to build a tangible correlation between gold and platinum prices.
Even platinum and gold are both precious metals, they have different market characteristics. The factors affecting platinum and gold prices are fundamentally different from each other.
Platinum has a weak association with conventional asset efficiency and performs well throughout economic recovery times. A platinum allocation improves a portfolio's risk-adjusted returns including when gold is existent.
That being said, it is still possible to build our own educated estimation by using logical reasoning and historic market data.
When the gold market acts bullish, platinum prices are likely to drop. Unless there is a significant rise in market demand for platinum our assumption is right.
In addition, platinum is a rare metal that is more expensive to produce than gold. And it has been trading below gold for a number of years. The Platinum market is quite volatile, take that into consideration if you plan to invest in platinum.
Platinum investment can be lucrative if you can foresee a rising industrial demand or panic purchasing of precious metals.
Platinum to diversify a portfolio
Investors seek two main objectives to meet investing in any asset class. They are growing their capital and hedging their portfolio against unexpected market conditions. Platinum seems to be a good option that helps investors at this point.
It may appear unusual that one may choose such a volatile investment as platinum, the price of which can sometimes move radically to reduce risk, as we might say that investing in platinum is in itself a quite risky affair.
However, platinum as I have said weakly correlated with other asset classes. Keeping a portion of any portfolio in platinum would act as a powerful hedging tool.
To the degree that platinum moves in the reverse direction from the stock market, which may happen, then platinum would act as an even better hedge than cash or bonds since the gains in the platinum market can vastly recoup the losses of your stock portfolio.
However, how well this tends to work relies on the conditions, as investor demand does not propel the platinum market completely, while it can push it a lot at odd moments.
If there's any flight to platinum throughout stock market crises, this tends to trigger upward pressure on the platinum market, but the magnitude of the flight coupled with the other market forces, particularly the primary market, will also matter.
Taking positions in platinum as an overall hedge, not special to any particular necessity to hedge at any given time, regardless of where either the global economy or the platinum market are heading, is not a principally smart strategy, although it is used quite frequently.
If there is a rise in the stock market, the need for a hedge is diminished, and preferably we will hedge our positions more as necessary, and less when this need is weakened.
For example, in the middle of a bull run, you may be worried about the risk of diversification, subjectively, but risk management also needs to take into consideration objective criteria such as market dynamics, and this is the more essential of both.
The platinum market may not be moving in the trajectory you'd like, so it's also smart to assess what the platinum outlook is, and allow both of these considerations to properly assist your investment choices.
Reasons to Invest in Platinum
Platinum is a precious metal that is demanded both by numerous industries as well as investors. Platinum investment can be very lucrative if you have a good understanding of its market fundamentals.
As a platinum investor, you should know what moves the platinum price.
It is also equally important to know if any correlation of value exists between platinum and other precious metals.
Platinum provides a unique investment incentive, with certain considerable benefits. For instance, platinum is exchanged at a reasonable premium to gold.
During the last 40 years, there have been only four instances when platinum has been valued for a prolonged period at a reduced price to gold. In all these instances the price has recouped substantially in the years that followed.
Platinum prices tend to rise during steady economic growth. Because platinum is an essential raw material demanded by different industrial processes. On the other hand, during economic instability, platinum prices tend to fall due to decreased industrial demand.
The platinum market is volatile, so investing in it requires careful analysis. It lost 2/3 of its value in 2008, falling from $2,252 to $774 per oz.
Can you see how much a volatile platinum may be during a financial crisis?
You may think gold also lost its value during that time period. That's right. But, gold prices fell from $1,000 to $700, projecting a far superior hedge compared with platinum.
A certain portion of platinum is used for investment reasons, being formed into platinum coins and bars, to be stored by investors, but this represents in fact only a small proportion of the overall platinum mined.
If you take into account the fact that platinum production is only a tiny fraction of gold and silver, this shows that the quantity of platinum usable for investment goals each year is a minuscule amount.
It can be seen by investors as a positive thing because it is the rareness of a product which makes it so valuable when the supply is so small that the demand for it will drive the price up substantially.
That's just what ‘s happening with platinum. While it's worth less than gold now, it's spent much of the 21st-century selling at an even greater price than gold, hitting at more than $2000 an ounce in 2008.
Platinum has lost half of its value over the last 10 years since its peak. It gives an idea of how volatile platinum really is. 2008 was in the midst of the Great Recession.
It wasn't long after platinum peaked that the stock market fell, more than tripled over the 10-year period since platinum fell by more than 50%.
This does not make that platinum is always adversely correlated with the financial markets, and occasionally both the markets and the platinum can move together, sometimes very substantially.
People assume they move independently and often they do, but sometimes they don't. We should never simply assume a correlation among both assets at any given moment without properly analyzing the market conditions.
Arguably, it has been suggested that investors should keep a percentage of precious metals in their portfolios to act as both a safe haven commodity and a hedge against inflation. It is clear that gold is an outstanding investment metal in this regard.
However, others now point to platinum as equivalent to gold, but with more significant economic fundamentals.
Platinum has been shown to enhance the efficacy of precious metals allocations by functioning as a diversifier for long-term portfolios.
It is worth noting that if investors in gold had included 5% of platinum in their portfolios, their risk-adjusted returns over the past 30 years would have been greater.
Platinum is a precious metal investment that can meet the needs of both institutional and retail investors to include in every type of portfolio.
In addition, it is now convenient for private investors to acquire platinum exposure through readily available exchange-traded funds (ETFs), fully backed by vaulted physical delivery bars.
Is platinum a long term hold?
Platinum would be a quite fine asset to speculate on, due to its high volatility.
Platinum prices can rise or fall quite substantially, and if you are on the correct hand of the platinum market at the correct time, those who seek to take benefit of these movements will have the opportunity to accumulate substantial capital.
Just like other precious metals, and almost any financial asset, one has the ability to speculate in any time span, from the longest to the shortest, on the platinum prices.
However, unlike stocks, long-term portfolios of precious metals, including platinum, do not perform too well in the long term and are best suited for limited to intermediate holding periods.
We have only about four decades of platinum trading history on financial markets, but during the period we've observed the price bounce around quite a bit, just like other precious metals, they don't really perform well over the very long-term net of inflation, as stocks tend to.
Therefore, if one follows such a long-term approach, and fails to employ tactics to time their positions, purchasing with the purpose of holding until the urge emerges to sell, then platinum is not a suitable investment.
When one is willing and able to plan their platinum positions correctly, seeking to ride the trends the market is moving through, then platinum will also offer some interesting opportunities to profit from.
This is especially true for those that are willing to go both short or long platinum, which can of course not be done by simply purchasing physical platinum, as this necessitates trading platinum futures or other derivatives that allow you to take advantage of price changes in any direction.
We may use either fundamental or technical analysis to try to forecast and foresee market shifts in platinum.
In reality, the truth is ultimately told on the charts and those who are reasonably skilled in reading charts and metrics may find platinum very worthwhile as a means of converting those skills to meaningful income results.
This is especially the case considering that certain instruments such as futures and contracts per difference allow for much larger leverage than with physical platinum, either owning physical platinum or owning shares of a platinum fund, although we also need to be cautious to leverage benefit and not downsides since with higher leverage, we can make and lose more money, a great deal of money.
Platinum is undoubtedly a fascinating and dynamic commodity though, and though most people focus on silver and gold with their investment and trading in precious metals, platinum is worth at least a fair shot as well.
What form of platinum should you invest in?
If you plan to invest in platinum, you have a few options. You can buy physical platinum or you can invest in platinum ETFs or mining indexes. Each type of investment has its own plus and minus.
The major issue with physical platinum is storage. You need to calculate in advance where to put platinum bullion once you have purchased it. Also, precious metal dealers usually charge significant premiums that may remarkably affect profitability of physical metal ownership.
Fortunately, this is not a problem with platinum ETFs and mining indexes. Paper-based platinum assets are also more liquid once you want to sell.
Does platinum price has a correlation with the gold price?
Both platinum and gold rare metals and has industrial uses. However, industrial demand affects platinum prices more than gold. While only less than 8% of the world's gold is used industrially, more than 50% of platinum production of Platinum goes to industrial uses. The price for both metals is also affected by the demand from jewelry and investment markets as well supply constraints in mining operations around the world that produce these two precious commodities. Most precious metals gain value during economic downturns. However, neither gold nor platinum is guaranteed to move in the same direction. Even if this is true, the correlation between gold and platinum isn't strong enough to predict similar gains.
Is it possible for platinum to outperform gold?
Platinum outperformed gold until the end of 2008. But since then gold prices trended consistently over platinum prices. Platinum's price highly depends on its industrial use, new industrial uses of platinum may trigger platinum to outperform gold again.
What is the best way to invest in platinum?
The best way to invest in platinum is through the purchase of bullion coins, or bars from a trustworthy minting company that produces platinum bullion coins. Pay attention to the bullion purity, issue year, weight, and how it is stored to avoid buying counterfeit products. You can also invest in an ETF (Exchange-traded fund) that primarily invests in physical platinum. This eliminates the need for storage and insurance while still allowing you to invest in platinum products.
Platinum can be a very good investment tool if it is used as a part of an investment portfolio.
That said it is important to consider the dynamics of the platinum market. All markets go through similar phases, therefore it is important to analyze at what stage the market currently is.
We have underlined that platinum is a volatile asset compared with other metals. Therefore investing in platinum wisely calibrate your position size. Overexposing your assets heavily investing in platinum may bring unpleasant consequences.
Finally, always do your own research. The content on this website is never intended to be investment advice but for educational purposes only.