Is Platinum a good investment?

Should you invest in platinum?

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Platinum

Everyone wants to grow their money. Therefore they invest their money in different asset classes. The hope is to sell the acquired asset to a more expensive price later on.

However, this post’s focus is platinum. Can you grow your money investing in it? Is platinum a good investment you should be doing?

The short answer is yes. However, the better answer is, it really depends.

It heavily depends on how you plan your investment. If you are aware of the fundamentals and used them in your technical analysis you can make money investing in platinum.

Needless to say, you should have proper risk management measures in place. You should never go “all-in” with any type of investment. Calibrating risk exposure defines the difference between a smart investor and a gambler. I believe you don’t want to gamble with your money.

Fortunately, I am going to layout the market fundamentals of platinum. So that you will be able to make a more conscious decision with your investments.

You may have previously invested in gold and silver. Although these assets are great, they may not offer a good entry point every time. If you invest only in these metals, you may need to wait a long time. Really, precious metal investors have only a handful of investment options.

The good news is there are other alternative precious metal assets becoming increasingly popular. They are mainly platinum and palladium. In this post, we are going to focus on platinum.

What is platinum?

platinum mined

Platinum is one of the world’s rarest precious metals. We already know gold is rare. All available gold would fill three Olympic size swimming pools. However, available platinum today could only cover your ankles in the same swimming pool.

Platinum is an exchangeable commodity. It is available in financial markets in forms of bullion coins, bars, and ingots. It has a very brief history compared to other popular precious metals.

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 not only used for jewelry production as many people thought. It is also a rare investment commodity included in investment portfolios.

Platinum has certain unique characteristics.

Platinum is a rigid yet ductile metal. Without cracking or breaking, it can be hammered or squeezed into shape and stretched without having lost its hardness. A gram of platinum can be spread out over a mile in a tube! It’s also heavy, a six-inch platinum cube weighs just as much as the average individual.

That is why it is heavily demanded by various segments of the market.

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What makes platinum so special?

Platinum is rare and constantly demanded by industrial processes. That is why most analysts seem to agree on platinum to reach a far better position in the future.

Many investors tend to overlook platinum, but there are a few reasons to invest in platinum.

Limited supply

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 process to mine and process. 

Growing demand

The platinum market is developing in both manufacturing and investment fields. Platinum is an essential manufacturing raw material and used around 20% of all consumer products. 

The metal has superb characteristics like high corrosion resistance, remarkably high melting point, electrical conductivity. Those characteristics make it an increasingly demanded material in numerous industries.

In addition, there is also a growing investor interest for platinum. Both institutional investors and retail investors started to include platinum in their portfolios. 

Today it is entirely possible to invest in platinum backed IRA plans, mining stocks, and derivatives. 

Price performance

Precious metals generally perform well in unstable economical environments and platinum is not an exception to this rule.

Platinum is susceptible to similar investment risks as gold and silver. It is also less liquid than major precious metals (gold & silver) so expect the spread to be slightly wider. 

Both gold and platinum are affected by industrial production demand. However, platinum is much more often used than gold, therefore its price is closely tied with economic growth. 

One major industrial use of platinum is automobile exhaust catalytic converters. In the case of platinum demand industries grows, the platinum prices will move up as it is expected. The opposite of this condition (less industrial demand and decrease in platinum price) is also expectable.

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 perform well as a long-term investment, meeting private investor needs.

It is ideally suited for medium to long-term investors who can tolerate short-term volatility and fully understand the attractive underpin coupled with its industrial premium based on its real value-in-use in industrial uses and the deficits in supply and demand.

In addition, platinum is well-fitting to thematic investment philosophy and is connected to global megatrends such as fighting climate change, improved access to health care, and clean water provision. It is not commonly known what role Platinum plays in these trends.

The solid financial performance of Platinum in the past has been motivated by its rarity, diversity of uses, diversity in geographic usage, limited supply, and effective stimulation of demand. These drivers are still relevant today.

Where is platinum demand sourced? 

Most of the demand for platinum comes from four areas.

Automotive

The single largest use of Platinum is in automotive exhausts, where it plays an exceptional role in regulating harmful emissions from vehicles. Rising emerging market demand for cars, especially combined with more stringent global emissions regulations, is indicative of strong long-term growth characteristics.

Industrial

Platinum is utilized in a range of manufacturing uses ranging from biological applications to glass fiber, liquid crystal glass, and jet engine blade production. Within the next few years, growth in industrial use will remain primarily influenced by the world economy. For instance, platinum is used for fertilizer in the manufacture of nitric acid and the need for platinum will increase as the global appetite for food grows.

Jewellery 

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.

Investment

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 Drives the Platinum Market?

Platinum mining
Two Rivers platinum mine in South Africa.

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.

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.

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.

Are platinum and gold prices correlated?

platinum gold price correlation

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.

Conclusion

Platinum can be 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 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.

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