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A Perfect Storm May Be Brewing for Platinum


The metal is already off to a roaring start for 2013, and its trajectory looks unlikely to change.

Platinum is an exotic investment. All the exchange-traded funds that track the metal hold about $2 billion between them. That compares to $70 billion just in the smash-hit SPDR Gold Shares ETF (NYSEARCA:GLD). But the herd has had its priorities wrong lately.

Platinum is off to a roaring start for 2013. The most relatively popular fund, ETF Physical Platinum securities (NYSEARCA:PPLT), has gained 11.7% year-to-date and 8.6% over the past three months. The corresponding numbers for GLD are -1.8% and -4.8%. There are reasons for this divergence beyond market whimsy.

Half of all gold produced in the world is bought up for investment. So the market moves on sentiment, and lately no one can really tell what that sentiment is. Gold prices fell during the stock market doldrums last fall, then fell more during the last three months of rally.

Platinum is called a precious metal, but it is really an industrial material. Just 8% of world production is used for speculation, according to market authority Johnson Matthey. Jewelry accounts for 29%, and the remaining 63% is devoured by manufacturing. More than half of that is consumed by auto manufacturers who use platinum and its rarer sister palladium to build catalytic converters.

So the platinum market runs on pretty transparent fundamentals. If you want to judge where demand is heading, look at car sales, and Chinese car sales in particular. It happens that Chinese car sales have been kicking butt for the past six months after a lackluster previous two years. Unit purchases in the No. 2 economy jumped fully 50% between July and December, then climbed another 9% in January, according to China Daily. Even if this demand explosion slackens a bit later in the year, that still spells a hearty appetite for platinum.

Platinum supply is still easier to understand than demand. It all depends, more or less, on South Africa, which accounts for three-quarters of the world's output. You may have heard that South African platinum mines experienced a wave of wildcat strikes last year, some of which escalated into fatal confrontations between miners and police.

Those thankfully died down, but they took a bite of production. The amount of platinum hitting world markets dropped by 10% in 2012. Demand held steady, creating the largest deficit in a decade.

The price of quieting the strikes was wage hikes in the neighborhood of 20%, swelling platinum miners' biggest cost when their margins were already squeezed. South Africa's state-owned power company, Eskom, is also piling on, proposing to raise the price of mining companies' second-biggest input by 15% per year for the next five years.

In short, the chances of platinum's Big Three producers -- Anglo American (PINK:AAUKY), Impala (PINK:IMPUY), and Lonmin (PINK:LNMIY) -- digging deeper to increase output are slim. The miners' current average cost is more than $1,600 per ounce, barely below the world price of around $1,700, estimates Will Rhind, managing director of ETF Securities. "The price would have to go a lot higher than it is to spur more production," he says.

A word of caution: Platinum prices can be more volatile than gold prices. After the metal reached its last peak in August 2011, it dropped 25% over the next four months. But with demand expanding, supply constrained, and inventories run down, it looks like the current upturn should have further to run.

Also see:

Is Gold Becoming a Risk-Off Asset?

8 Sweetheart CEOs: More Cash for Shareholders, But...

Still a Little Soon for Gold Bottom, but Getting Closer
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No positions in stocks mentioned.

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