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The Platinum Opportunity – Part 1

By John Ciampaglia, CFA, CEO, Sprott Asset Management

This is Part 1 in our series focused on platinum. Part 1 serves as a primer on platinum, and in Part 2 we explore the unique supply-demand fundamentals that support our bullish outlook.

PLATINUM’S MULTI-YEAR WEAKNESS

When comparing spot prices for platinum and palladium, it’s easy to assume that vastly different storylines have shaped the performance of these two metals. Over the past six months, platinum’s price has continued its multi-year decline, falling below $800 ($791 as of Friday, August 24) – close to its lowest level in a decade. Palladium’s fate, by contrast, has seen far more luster, as it surpassed $1,000 in price for the first time late last year. In recent weeks, a surging U.S. dollar on the back of trade-war fears has pushed all metals lower.

Platinum, as shown below, is trading well under the 1.0 platinum-to-gold ratio that is considered the historical norm, and which we have not seen since 2015. The current ratio of 0.66:1.0 means platinum is currently a bargain: an ounce of platinum is selling at 66% the price of an ounce of gold. Platinum is also severely undervalued relative to its white gold “cousin” palladium given that it has historically traded at 2-4 times the cost of palladium.

Figure 1: Platinum vs. Gold and Palladium Prices Since 2000. Source: Bloomberg. XPT (black line/shaded blue) represents platinum; XAU (gold line) represents gold; XPD (dark blue line) represents palladium.

“PRECIOUS” IS RELATIVE

Platinum (Pt) and palladium (Pd) are primarily used as industrial metals but also have a strong correlation to the “precious” metals gold and silver. Both are much rarer than gold and represent tinier markets. Recent world production of platinum and palladium has averaged about 175 and 200 tonnes per year, respectively, while gold production tallies approximately 3,000 tonnes per year.

Also known as “white gold” or the “bright white metals,” platinum and palladium are members of the Platinum Group Metals (PGM) and typically co-occur in ore deposits (the group also includes ruthenium, rhodium, osmium and iridium). Their shared chemical origins give platinum and palladium similar characteristics, such as being relatively inert and having high melting points – appealing features for use as catalysts in industrial and automotive applications. Platinum is denser and stronger than palladium, and has historically commanded a higher premium; it’s also the preferred choice for jewelry, driving additional demand. South Africa is the world’s largest producer of both metals, with its storied Bushveld Igneous Complex (BIC) responsible for 75% of the world’s platinum output and 50% of its palladium. Russia is the second largest platinum-producing country but surpasses South Africa in palladium. Zimbabwe, Canada and the U.S. round out the top-five homes to the PGM.

Figure 2:The Automotive Industry is the Largest Pt-Pd Consumer: Catalytic Converters1

The primary driver of demand for both metals is the automotive industry. Platinum and palladium are key elements in the manufacturing of catalytic converters which help reduce toxic emissions from automotive exhaust. Rising car production (especially in emerging economies) and tightening emissions standards worldwide has fueled steady growth in the use of catalytic converters.

Historically, platinum has been the much more expensive metal. However, over the past decade demand for lower cost palladium as an alternative has soared and platinum demand has fallen.

Although palladium has been the bigger beneficiary of auto sector momentum and trends in recent years, our view is that this dynamic may be changing in favor of platinum.

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MARKET SUMMARY

INDICES

Name Last Change
DOW 24998.90 1.15%
S&P 500 2692.06 1.12%
NASDAQ 7120.09 1.13%
TSX 15080.57 0.34%
TSX-V 614.95 0.00%

Resource Commodities

Name Last Change
Gold 1214.10 0.92%
Silver 14.16 1.06%
Copper 2.69 0.010
Platinum 830.50 0.90%
Oil 55.69 7.61%
Natural Gas 4.10 7.63%
Uranium 29.15 0.00%
Zinc 1.17 0.00%

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