Jeb Handwerger: There are real supply concerns for Platinum Group Metals or PGMs as laborers continue to protest for higher pay in South Africa. Laborers may demand a large pay increase while the South African producers are unable to stay profitable. There is increasing speculation that PGMs could soar higher.
Investors could use this pullback in the metals to add to platinum (NYSEARCA:PPLT) and palladium (NYSEARCA:PALL) at the price levels it was before the violent labor protests which killed over 44 miners. South African labor issues combined with increasing auto demand from emerging economies could lead to a supply shortfall and a major price increase in platinum and palladium.
Some large producers such as Anglo American may close some mines. Platinum and palladium are extremely undervalued as most miners can’t be profitable at current price levels. South African companies are struggling to survive with high cost production and rising labor costs. Investors should look at advanced undeveloped projects in mining friendly jurisdictions.
For several months, I have written to my readers that platinum and palladium may outperform gold and silver. Now other big investors are catching onto this theme first brought to you right here.
Over the past year, palladium is the only metal that has gained ground in an uptrend and platinum has held 52 week lows while gold (NYSEARCA:GLD), silver (NYSEARCA:SLV), and copper (NYSEARCA:JJC) have hit new lows. The reason behind this outperformance in Platinum Group Metals (NYSE:PGM) during a weak metal market should be addressed.
Platinum and palladium have recently outperformed gold and silver after underperforming relative to gold since the credit crisis as the auto industry collapsed and was bailed out by Washington. Weak demand and volatility in the auto sector caused the industrial side of the PGM market to be in surplus.
However, since that time automobile manufacturers have rebounded significantly. General Motors (NYSE:GM) and Ford (NYSE:F) are hitting new highs. Record low interest rates are boosting consumption. Demand for automobiles especially from emerging nations such as China are surpassing that of the United States. These countries dealing with significant air pollution need platinum and palladium for catalytic converters to decrease noxious emissions.
At the same time, labor disputes are putting constraints on supply from South Africa. Platinum and palladium is unprofitable to mine there as the country has some of the deepest, dangerous and high cost mines in the world. Russia becomes the next big player for PGMs and their stockpiles have been rapidly dwindling.
With the increase in demand for platinum and palladium worldwide and the constraints on supply from South Africa and Russia, I expect to see these metals continue to significantly outperform as they did before the credit crisis in 2008.
This pullback in the metals complex may give an opportunity for investors to diversify into platinum and palladium, which have both a practical use as a monetary hedge against inflation and as a critical industrial component for clean automobiles. In addition to automobiles, PGMs are used in cell phones, jewelry and computers.
Supply for Platinum group metals may be at an all time low, while increasing demand for clean automobiles may support a price move higher. Investors and consumers will need addition platinum and palladium projects in stable mining jurisdictions. Recycling may not be able to fill the supply gap alone.
In addition, attention should be paid to the rare earths (NYSEARCA:REMX) which may also see the end of the recent two year downtrend. Rare earths are used not only in wind turbines, smartphones, iPads and guided missiles, but they are increasingly used in automobiles to improve fuel efficiency. Newer more fuel efficient cars use almost double the amount than older gas guzzlers.
The rare earth etf (NYSEARCA:REMX) has made a significant breakout above the 50 day moving average on record volume. The two biggest rare earth miners are up close to 30% in the month of May.
Lynas received good news that the National Front coalition was voted to assume power in Malaysia where their separation facility is located. Lynas has been dealing with a vocal opposition but the election was a major support for the facility which is the largest separation plant outside China.
Molycorp Inc. (NYSE:MCP) the owner of Mountain Pass, the largest rare earth deposit outside of China, is making a powerful breakout above the 50 day moving average. This is the largest high volume gain since it went public back in the summer of 2010. The company showed sales are increasing and demand is picking up. This may prove to be a turning point for the sector.
Remember China controls the rare earth sector and at anytime could disrupt the supply of these metals. The Chinese cut off exports back in 2010. This led to a major stockpiling and speculative buying from end users. Many of the industrial end users may be running out of those rare earth metals especially as global demand for fuel efficient vehicles has been increasing significantly. They may now look to secure supply from advanced heavy rare earth miners.
In conclusion, the global recovery is picking up as Central Banks around the world promote negative interest rate policies. These record low interest rates are spurring demand for newer, cleaner and more fuel efficient vehicles. Platinum, Palladium and rare earth demand should increase significantly on this rebound in demand as supply remains critically tight from South Africa, Russia and China.
Disclosure: Author does not own any securities mentioned in article.
This article is brought to you courtesy of Jeb Handwerger From Gold Stock Trades.