Why Investing in Platinum & Palladium

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Dear PGM Capital Blog readers,

In this blog article we want to discuss with you why investing in Platinum and Palladium can be so lucrative and why some analysts and investment advisors nicknamed Palladium, “The Metal of the 21st Century”

Platinum and Palladium are both precious metals, which together with rhodium, ruthenium, iridium and osmium form a group of elements referred to as the platinum group metals or PGMs, which are very scarce, of which Palladium and Platinum are respectively the 5th and 8th scarciest element in the Earth’s crust.

In addition, platinum and palladium, as well as silver, are being used more and more as an industrial metal in high tech applications such as renewable energy production and as a catalyst in chemical conversion processes.

The Automotive Industry:

Industrial demand for platinum and palladium comes mainly from the automotive industry. Modern cars are equipped with a catalytic converter which converts up to 90% of harmful gases from auto exhaust such as hydrocarbons, carbon monoxide, and nitrogen dioxide into less harmful substances like nitrogen, carbon dioxide and water vapor. Vehicles that run on gasoline mainly use a Palladium Catalyst while platinum catalysts are used the most for diesel vehicles.

As the number of cars on the road increases, further cuts in pollution per vehicle are needed to keep improving air quality. Many governments in the fast growing emerging markets, are putting legislation in place to catch up with the standards already implemented in the US, Europe and Japan. Catalytic converters are now also required in construction and agricultural equipment in many markets.

The automotive and industrial demand for platinum and palladium are highly dependent on economic trends and the health of the major world economies. Despite the ailing world economy, Palladium has outperformed the U.S. “benchmark” the S&P-500, during the last three years as shown in below graph.

Palladium versus the S&P-500

The blue graph shows the 5-year chart of the S&P-500, while the red one indicates the palladium price developments during the last three years.

The Supply and Demand Picture:

Currently, 75 percent of all Platinum and Palladium produced on the planet comes from South Africa, which country also holds 95 percent of all known reserves of these two elements.

How important this is for the price of both metals, became clear last year when the supply of both metals came under stress due to months-long strike in the South African mines, with the consequence that Platinum and Palladium rose to respectively USD 1734.00 and USD 781 per troy ounce as can be seen in the graphs below.

Platinum 1 year chart

Palladium 1 year

The above 1-year charts of both metals, support our point, that the price of Platinum and Palladium is not being determined by the demand but by its supply.

From below graph we can see how the total world supply of both metals is related to their demand as catalyst in the automotive industry.

Palladium & Platinum supply - demand graphThese three graphs sustain our interest in both metals, specially in palladium.

Furthermore, it is noteworthy that about 55% of all Palladium produced in the year 2012, has been used in automotive catalysts.

Due to the ever decreasing supply of both metals, it is clear that we are on the verge of a supply crunch for both metals, with the consequence that their prices may shoot through the roof.

Additioal important information:

Platinum:

  • The supply of platinum fell in 2012 so much that in that year there was a shortage on the market, as opposed to a surplus in 2011.
  • Frequently and prolonged strikes in the South African mines have led that the world’s largest producer of platinum, “Anglo American Platinum Ltd.” (Amplats), is considering mothballing two of its operating mines.
  • The increase in global demand for platinum jewelery in 2012, resulted in 30 percent of all platinum produced finding its way to the jewelry industry.
  • Platinum is also used in the petroleum industry as a catalyst in a number of separate processes, but especially in catalytic reforming of straight run naphthas into higher-octane gasoline.
  • The demand for platinum as an asset protection vehicle grew in 2012 by 6.5 percent, with the result that currently 6 percent of all Platinum produced finding its way into vaults or as coins and bars as a means of asset protection.
  •  Platinum resistance thermometers “PT-100” are being used as a temperature sensor, in a broad range of household, medical and industrial equipment and application, for which temperature must be measured and controlled.

Palladium:

  • Declining production in both South Africa and Russia, respectively the world’s largest and second largest producer.
  • Palladium plays a key role in the technology used for fuel cells, which combine hydrogen and oxygen to produce electricity, heat, and water.
  •  In 2012, total demand for palladium increased with 16 percent, for which it usage as catalyst in the automotive industry accounted for the largest share, followed by the demand for palladium as an asset protection vehicle.

ISO Currency Code:

It is also worth mentioning that Platinum and Palladium together with Gold & Silver are the only four metals for which their bullions have  ISO currency codes as follows:

  • Gold = XAU
  • Silver = XAG
  • Platinum = XPT
  • Palladium = XPD

The general expectation is that the production of platinum this year will fall to about three hundred fifty thousand Troy Ounce, which also involve the production of palladium,
-found in the same ore- which will fall to about one hundred seventy thousand Troy Ounce.

In the time that Central Banks all over the world are printing money out of thin air, Platinum and Palladium due to their scarcity, chemical and physical properties and the fact that they have an ISO currency code, have become very attractive as an asset protection vehicle, beside Gold and Silver.

Latest Development on Palladium:

Palladium went up today with USD 12.00 an oz or 1.59 percent to close at USD 767 an ounce,  which is just USD 7.00 an oz shy of its 52-week high close of USD 774.00 an oz, reached March 15 of this year.

Please see below chart for Palladium today’s price performance.

Palladium June 10 2013

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek

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