Platinum and Palladium Investing

Just recently, we learned that George Soros had apparently anticipated the April gold crash and had accordingly dumped some of his gold ETF holdings. Indeed, thus far in 2013, gold via ETPs has fallen 17 percent.

At the same time, platinum and palladium demand (and prices) are soaring – largely because mining companies are working to control supply more closely.

According to Bloomberg analyses, platinum could be up nearly 16 percent to end this year at around $1,690/oz, while palladium could gain about 7.5 percent to end the year at around $800/oz.

It seems all but certain that gold will close out this year with an overall decline, meaning its 12-year-long high streak will likely end with 2013.

Gold, it seems, has lost some of its luster. Meanwhile, platinum and palladium are garnering strong investor interest. It’s quite likely because both of these metals are used in the manufacture of catalytic converters for automobiles.

Two factors are of relevance here. First, car sales are booming worldwide. Second, both platinum and palladium are facing supply shortages. Do the math.

Bloomberg reports:

“Anybody who wants to participate in precious metals, that’s getting whipsawed like on gold, is looking at much smaller precious-metals markets as being attractive,” said Jeffrey Sica, who helps oversee more than $1 billion of assets as president of SICA Wealth in Morristown, New Jersey. “If you look at platinum and palladium, even with an economic slowdown, they’re able to maintain healthy levels of demand.”

Platinum and palladium find 60 percent and 91 percent application in industrial usage, respectively. Gold, in contrast, accounts for a mere 10 percent.

Over 2012, palladium demand rose 16 percent. Platinum dropped 0.6 percent, though that still ranked as the third-highest level of demand ever. The present shortages are largely due to mining strikes, which have led to drops of 10 and 11 percent in platinum and palladium production over 2012.

Supply Shortages and Low Auto Sales

It’s also of consequence that platinum and palladium production is heavily concentrated in just two countries. South Africa and Russia together produce nearly 86 percent of all the world’s platinum, and those two countries also account for nearly 80 percent of the palladium supply.

Just recently, the South African mining strikes meant companies there lost as much as 15 billion rand, according to National Treasury estimates.

Barron’s reports that automobile sales are set for high projections in both the U.S. and in China. Chinese sales are in the double digits for March and April, with the strong showing expected to continue. And here in the U.S., April sales were 11 percent over figures posted in the same period last year.

But the South African problems persist. This summer, many mining companies are due to meet for negotiations over two-year wage agreements. That’s bound to spark some contentious debates.

Russia’s problem is a bit different; reserves are simply in decline. As a result, they’re mining ore of ever-decreasing quality, meaning efficiencies are going down as well.

The South African turmoil has had its effect on the price of palladium. This February, for instance, futures shot up to $783.95 – a level not seen in 16 months – before collapsing back down to $661.40.

Economic Factors

Meanwhile, the U.S. dollar has been gaining strength. The appreciation has, naturally, caused precious metals to fall back somewhat. Nonetheless, the palladium deficit continues to hog the limelight, as last year’s deficits for both platinum and palladium begin to take on foreboding shades. Evidently, we should expect the price rally to continue as supply shortages and mining problems hang around.

However, platinum may fall behind slightly, since diesel catalyst sales in Europe are low and demand for platinum jewelry overall is a bit anemic. The European problem also has some wider ramifications. Austerity has not been good to Europe overall, and automobile sales are, consequently, at a 17-year low.

Clearly, the overall economic picture over there will need to improve substantially before consumers can go out and buy cars.

Meanwhile, Anglo American Platinum Ltd. (OTC: AGPPY) reported an overall loss in 2012 of $705 million due to the mining strikes. Earlier this month, the company stated it would cease operations at three shafts, laying off around 6,000 employees in an effort to shore up its bottom line.

Overall, platinum production is expected to be lower this year by around 350,000 ounces. That also means palladium – found in the same ore – will be lower by at least 165,000-170,000 ounces. 

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