Increasing Demand For Platinum: How To Play This Precious Metals Leader (PPLT, SWC, NILSY)

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February 1, 2013 4:24pm NYSE:PPLT

platinum-etfLarry D. Spears: If you’re looking for a hedge against either a coming market downturn or an uptick in inflation, you should consider investing in platinum.

Platinum, like gold and silver, will benefit from the growing number of global central bank policies that will weaken paper currencies and drive up metals prices.

“With central banks on their virtually uninterrupted fiat money-printing spree bound to continue for the next few years, hard assets remain a great place to be,” said Money Morning Global Resources Specialist Peter Krauth. “That being said, some commodities will undoubtedly do better than others.”

Platinum is one of those commodities.

In fact, a number of leading commodity analysts predict platinum could far outshine gold in 2013 – for a variety of reasons.

Increasing Demand for Platinum

For starters, the demand for platinum is much more broad-based than for gold, which is supported primarily by investment demand and jewelry manufacturing.

Platinum shares both those markets, and is actually more sought-after for fine jewelry these days. That’s because of its rarity and hypoallergenic and tarnish-resistant properties, as well as the fact that diamonds and other precious stones appear much more brilliant in platinum settings than in gold.

However, platinum is also vital in a number of other capacities.

The most important use of platinum is as a catalyst in automotive converter systems, which turn deadly carbon monoxide and other dangerous exhaust-gas emissions into harmless carbon dioxide and water.

Currently, almost half of the newly produced platinum each year goes for this purpose, and that demand will rise sharply as the global economy continues to improve and more and more nations address environmental issues (witness China’s recent air-quality crisis) by imposing tougher emission standards.

The same catalytic properties also make platinum an essential ingredient in petroleum refining, helping to produce cleaner-burning gasoline and high-octane fuels from crude oil via the so-called “cracking” process.

Environmental concerns are also steadily increasing worldwide demand for fuel cells, which create electrical energy from hydrogen and oxygen, most often using platinum in a filtration system known as a proton-exchange membrane (PEM). Originally designed for autos, fuels cells are now used in place of generators in many new buildings and as power sources for a variety of portable equipment, reducing the need for batteries.

Finally, computer manufacturers are using more and more platinum, which is used in an alloy with cobalt to greatly increase both the storage capacity and operating efficiency of hard drives and compact storage discs.

Supply in the Platinum Market

The supply side of the platinum equation is far different.

While there are fairly sizeable stores of existing platinum, most of that is held for investment and is unavailable for industrial use at present prices.

More than 90% of new platinum comes from mines in just three countries – Canada, Russia and South Africa – with a small additional amount being produced in the Serra Pelada region of Brazil. South Africa is the dominant producer, accounting for 70% of global output – and therein lies the biggest reason for the current platinum opportunity.

As Money Morning Global Investing Strategist Martin Hutchinson reported last year, unrest is running rampant among South Africa’s miners and many black activist politicians – most notably youth leader Julius Malema – are calling for huge tax increases on mining companies and possible nationalization of the country’s gold and platinum mines.

That probably wouldn’t spike gold prices since South Africa now produces just 12% of the world’s gold – but even a modest additional reduction in platinum output, which has already been hurt by scattered strikes and widespread power outages, could create an immediate global shortage of new platinum, sending prices through the roof.

Potential political problems are also growing in Russia, which could further impact supplies – and prices.

Investing in Platinum: What a Technical Analysis Tells Us

A third bullish factor for platinum is the technical picture.

The spot price for platinum as of Jan. 28 stood at $1,665 an ounce. That’s quite a bit higher than August’s 52-week low of $1,381, but still well below the yearly high of $1,722 an ounce set last February. It’s also way below the 2008 high of $2,252 an ounce set just prior to the global financial collapse.

More telling, however, is the platinum/gold ratio. Platinum has traditionally been priced well above gold, with one ounce of platinum being worth as much as 2.34 times an ounce of gold in January 2001 and 2.32 times as much in May 2008. Historically – at least since 1972 – the ratio has averaged one ounce of platinum to 1.36 ounces of gold.

This week, the ratio stood at just 1.002, having briefly dropped below 1.00 at one point. Though it dipped as low as 0.730 back in 1985, it has since found support several times at current levels, meaning a bounce in platinum prices relative to gold is highly likely in 2013 – especially given the other factors mentioned above.

That’s certainly Hutchinson’s current view, echoed by Money Morning Global Resources Specialist Peter Krauth, as well as several leading metals specialists in the fund industry.

Tom Winmill, manager of the Midas Metals Fund (MIDSX), told MSN Money Jan. 23 that platinum “could hit $2,000 by the end of 2013,” citing the fact that annual global demand, at 6.2 million ounces, already exceeds supply by 400,000 ounces and any further problems in South Africa would have to be “another positive for platinum” prices.

How to Invest in Platinum

So, assuming you agree with the bullish outlook for platinum, what’s the best way to invest?

The purist play, of course, is to purchase the metal itself, which you can do in the form of either bullion bars, typically available in sizes ranging from one-tenth of an ounce to one ounce, plain rounds or platinum mint coins.

These can be purchased from any reputable metals dealer, many of which were listed in the Money Morning report “How to Buy Gold.”

Be aware, however, that you’ll have to pay a premium over spot prices for smaller-sized bars or coins, and for small quantities, usually somewhere between 5% and 12%, with added charges if you want to pay with a credit card. The physical metal can also be cumbersome for trading purposes, and you may have to pay storage and shipping costs, cutting into your profits.

For traders with a little more capital, the platinum futures listed on the NYMEX Division of Chicago’s CME Group are a better choice. However, the contract size is a hefty 50 ounces, meaning a single future has a value of roughly $83,250 at current prices and a $1 move in the price is worth $50. You’ll also have to post an initial margin deposit of $2,970 for each contract you want to buy (or sell).

Platinum Stocks

The best approach for the typical investor is probably to purchase shares in the stocks of one of the mining companies that produce platinum – or, better yet, in a metals fund. With individual mining companies, it’s difficult to avoid exposure to the South African situation, but two you might consider are:

GMK Noril’skiy nikel’ OAO (PINK:NILSY), recent price $19.95 – This Russia-based company has a small operation in South Africa, but most of its mines and smelters are in Russia, Australia, Botswana and Finland, producing a variety of metals in addition to platinum. It also has subsidiary operations in Britain, the United States, Switzerland and China. The stock has a 52-week range of $14.30 to $20.55, and a market cap of $38.5 billion. However, as is the case with many foreign companies trading on the pink sheets, detailed earnings info isn’t readily available.

Stillwater Mining Company (NYSE:SWC), recent price $13.28 – This Montana-based firm mines and smelts platinum, palladium and other platinum group metals (PGM), and also has copper facilities near Lake Superior and in Ontario, as well as copper and gold operations in Argentina. It also runs a major platinum recycling operation. The company is fairly closely held and has a market cap of just $1.55 billion, but posted earnings per share of 49 cents in the latest fiscal year. Institutions hold more than 70% of the stock, which pays no dividend.

As for funds, the optimum choice is ETFS Physical Platinum Shares (NYSEARCA:PPLT), recent price $163.38. A trust that invests in physical platinum, the fund currently holds around $750 million worth of the metal to back the shares, which have a recent total market cap of $866 million. The price typically tracks the price of the actual metal, but runs one-tenth the value of a single ounce, less a small fee differential.

However you choose to invest in platinum, if your portfolio is light on metals and you’re looking to beef it up for 2013, platinum should be your first – and potentially most rewarding – choice.

Money MorningWritten By Larry D. Spears From Money Morning

We’re in the midst of the greatest investing boom in almost 60 years.  And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth  trillions of dollars; new customers that measure in the billions; an  insatiable global demand for basic resources that’s growing  exponentially ; and a technological revolution even in the most distant markets on the planet. And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact,  we believe this is where the only real fortunes will be made in the  months and years to come.

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