London, 27 October 2011

Sharps Pixley: After the sell-off in gold and platinum in 2008, both precious metals rebounded strongly from the October 2008 low by about 100% with platinum leading the way until early August 2011 when gold overtook platinum price.

Since then, platinum underperformed gold by about 17% to 26 October. Standard Bank found out platinum may be out of flavour as the net speculative position as a percentage of open interest in platinum has declined from about 38% in January to about 20% to October this year, mainly due to increase in short positions. ETF positions have also been flat this year compared to rising positions in the past few years. Platinum supply may also be rising in 2011 and 2012 just when global economies are slowing again.

Platinum price has mainly been driven by the strength in the industrial sectors: automotive industry (about 50% of demand) and the jewellery industry (about 20%), hence price has been strongly linked to the economy, and the economic slowdown caused by sovereign debt crisis in the West hit platinum harder than gold. However a closer look at the longer-term demand and supply picture of platinum could give a more sanguine picture.

First, auto and chemical industry catalysts continue to be strong, underpinned by rising demand for cars in developing markets especially China and India. First-time auto buyers and stricter emission standards would drive demand for platinum. However, a Platinum Investing News report cautioned against using a blind vehicle for vehicle comparison for Chinese auto figures compared with those in EU or the US given that China is a small, gasoline vehicle market which uses less of platinum in the catalytic converter. Nevertheless, as government incentives for small vehicles have expired and policy may be easing, demand for bigger and more cars should increase.

Another factor is the rising demand in jewellery especially platinum in China, the biggest consumer of platinum jewellery at about 70% of world demand, which could be further stimulated by the cheaper platinum price versus gold. Additional factors could support longer-term platinum prices. Johnson Matthey pointed out that in the past few years, platinum supply has not met demand, with 20 to 25% of demand satisfied by recycling of used platinum. 2010 was the first year that mining output and recycling did not meet demand. Also global demand for platinum for use in fuel cells reached 20,000 oz in 2010. The durability, power density and efficiency of PGM metals in fuel cells point to an important industrial demand base for platinum.

The last factor is valuation of platinum versus gold: from 2000 to 2008, platinum ranged between 1.5 to 2.4 times of gold. Currently, platinum trades at about 93% of gold price, indicating some undervaluation. The CEO of Impala Platinum recently commented that price for platinum could reach $2,000 by the end of 2012 as he sees a very positive order book for 2012 and describes “a disconnect between the financial world and real economy.”

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Austin Kiddle, Sharps Pixley
www.SharpsPixley.com
www.PGM.net