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Sunday, 14th April 2024
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Platinum reaches record high as investors look for diversification Back  
In January, platinum, the rarest of all precious metals, rose to a record high of $1085/ounce, as hedge funds and investors bought the metal used in jewellery and catalytic converters for cars to diversify their portfolios and seek high returns. With precious metals now being considered once more as an important asset to have in a properly diversified individual or institutional portfolio, due to their counter cyclical nature, Mark O’Byrne assess the outlook for platinum, and evaluates its performance compared with gold and silver.
The fundamental tenet of investment theory is to be properly diversified and not have all the eggs in the one basket – whether that be the stock, bond or property markets. It has been shown in numerous financial and academic studies that an allocation of some five per cent of one’s portfolio to precious metals is prudent.
Many financial professionals and investors worldwide recognise the important role that precious metals can play in stabilising and reducing volatility in a portfolio. This is particularly evident in the fact that the largest owners of gold bullion remain the world’s Central Banks and the IMF ( US Federal Reserve: 8133 tonnes, the Bundesbank: 3440 tonnes, the Banque de France: 3024 tonnes and the IMF: 3217 tonnes).

Central Banks maintain their gold reserves as gold is the only asset class which is no one else’s liability, in order to maintain full faith in modern paper currencies and to protect against monetary crises as experienced by the Bank of England during the sterling currency crisis of 1992.

Precious metals remain the ultimate safe haven assets. Unlike paper investments such as bonds and equities whose value is dependent on the performance of governments, corporations and the global economy, precious metals are hard, tangible, limited in supply assets whose value is intrinsic to nature. Thus, an allocation to precious metals can and should be used as the anchor or conservative base of future pension requirements or simply as a convenient and sensible way to save or as a hedge or financial insurance should an individual, institution or government have significant exposure to the stock, bond or property markets.

Platinum is the rarest of all precious metals. It is so rare that the US government considers it a ‘strategic metal’ and banned its ownership and use in World War II for non-military purposes.

Platinum has a wide variety of uses although about a third of production is used in automotive applications particularly in emission control catalytic converters. Platinum also has applications in electronics, chemical processing, petroleum refining, medical and dental applications and glass dies. It is increasingly desired for applications in fuel cells and other new technologies in order to combat global warming. It is estimated that about 20 per cent of the products purchased by modern consumers either contain platinum or use it in production and new uses are being discovered all the time.

Platinum’s beautiful silver blue colour makes it in high demand for prestige jewellery, which accounts for some 40 per cent of global demand. World demand is increasing as platinum jewellery is supplanting other precious metals and stones. With the exponential growth in the Chinese, Indian and Asian economies, demand for all precious metals are projected to increase exponentially.

In recent years, investment demand for platinum has also been increasing. There has been significant buying of platinum by investment funds in the last few years. Investment has not been limited to hedge funds, as private investors, mutual funds and pension funds have all been increasing their commodities exposure. Platinum is available for investment through coins and bars. The US Mint sells investment grade legal tender, Platinum Eagle, coins that contain 1 troy ounce of 0.9995 pure platinum. These coins are relatively scarce and have only been produced since 1997. Australia and Canada also produce investment grade legal tender platinum coins for investors.

Shares in platinum mining companies can be bought but they are far more risky than owning the physical, tangible asset as mining companies have country risk in the form of political interference and nationalisation, environmental risk, natural disasters, mining accidents, and accounting and company risk in the form of depending on the performance of employees, management and auditors. Larger investors and end-users usually purchase bars or ingots and invest in platinum through government certificates such as the Perth Mint Platinum Certificate Programme.

On the supply side, the only meaningful deposits of platinum are found in South Africa and Russia. These two regions account for roughly 90 per cent of global supply. But total global platinum production only represents about 6 per cent of global gold production and less than 1 per cent of global silver production. In addition to platinum being limited in supply it requires mining a lot of ore (8-10 tons) just to obtain one pure ounce of platinum.

Platinum is extremely rare and there also exists uncertainty surrounding future supplies, as there does with all finite resources. There is little available data on Russian reserves, while reserves in South Africa, which are responsible for some 80 per cent of global production, are dwindling.

With platinum a rare metal, difficult to find and to mine, and supplies predominately in one country yet with important industrial and military applications, a huge squeeze could occur if there were disruptions to South African or Russian mining production.

These disruptions could come in the form of strikes or political tensions in Russia where Putin is increasingly flexing his muscles. Thus platinum is a metal that remains susceptible to supply shocks, maybe even more so than gold or silver. However, as in any investment, there is the possibility of loss and investors should always remember the most important maxim in investing in all asset classes – past performance is no guarantee of future returns.

Precious metals perform well in less benign economic conditions. For example in the stagflationary 1970s, when there was low economic growth, rising inflation, rising interest rates and ultimately an oil crisis, precious metals and platinum, due to their counter cyclical nature, outperformed all other asset classes. Platinum went from $90 per ounce in 1971 to more than $1,000 per ounce in 1980 for a return of some 1000 per cent. In the same period gold soared from $35 to over $850 and silver went from $2 to over $50.

How has platinum performed in recent years? It is one of the top performing asset classes and has gone from $350 in January 2000 to $1,085 recently for a rise of 210 per cent.

Gold is up by 124 per cent and silver is up by 120 per cent in the same 5 year period.

While these returns are significant and may lead investors to fear that the best gains have passed, it must be remembered that oil has gone from $10 to $70 in the same time period, or some 700 per cent and other commodities such as the base metals, grains and soft commodities, are also up by far more than platinum.
At the dawn of the 21st century precious metals are again being considered as an important asset to have in a properly diversified individual or institutional portfolio. The precious metals of platinum, silver and gold are the only asset classes academically proven to have an inverse correlation to stocks and property which is important in an era of record debt levels, rising interest rates, record oil prices and increasing geopolitical tension.

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