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Is it Time to Add Platinum and Palladium to your Precious Metals Portfolio?

By Louis G. Navellier June 17, 2014

Turmoil in the South African platinum mines during a 21-week labor strike has sent both palladium and platinum up to new 2014 highs. Last Thursday, an agreement between the Association of Mineworkers union and South Africa’s platinum producers brought the price of platinum and palladium sharply down, but the unrest between South African mining laborers and management is far from over. It may just be beginning. After decades of dangerous work at low pay, the miners are determined to get their fair share.

 

Before union and management reached their “in principle” agreement to end the strike last week, palladium reached a 13-year high of $858 per ounce last Thursday morning, up 20% year-to-date. But the next day, after the miners’ strike seemed destined to end soon, the price fell back to $816. Still, even after last Friday’s return to reality, palladium is still the best-performing precious metal, year-to-date, by far:

 

Price source: Kitco; basis: London pm price fix

 

This latest development gives us time to look at the fundamentals for platinum and palladium – the two most popular and prevalent of the six Platinum Group Metals (PGMs), a nuclear family that includes two famous parents and four kids: Iridium, Osmium, Rhodium and Ruthenium (Iris, Ozzie, Rudy and Ruth).

 

However, to call platinum “popular and prevalent” is misleading. The PGMs are neither popular (widely held) or prevalent in the earth’s crust. The annual supply of newly-mined platinum is about 130 metric tonnes (each tonne is 32,150 Troy ounces). That’s about 5% of the world’s new annual gold supply and less than 1% of the silver mined each year. Platinum is far scarcer than gold, yet it sells for just a small (13%) premium over the price of gold. What’s more, most platinum is used up, while gold lasts forever.

 

The Market Life Cycle of an Ounce of Platinum

 

Miners tell us that it takes about 10 tons of ore to produce one ounce of platinum. As with gold, that ore is often located a mile or more beneath the earth’s surface, where temperatures usually rise above 120 degrees Fahrenheit. The platinum extraction process takes months. Hundreds of miners have died or been crippled in search of gold and platinum in South Africa. (No wonder the workers want better pay!)

 

Over half of the new supply of platinum and palladium goes into catalytic converters, which convert up to 90% of harmful gases from auto exhaust (like carbon monoxide, nitrogen dioxide and hydrocarbons) into less harmful substances like nitrogen, water vapor or carbon dioxide. Although they are silver in color, you could call platinum and palladium “green” metals. (Palladium is also used in dentistry, watch making, blood sugar test strips, aircraft spark plugs, surgical instruments, electrical contacts and beautiful flutes!)

 

The market for platinum and palladium is narrow – far more narrow than gold. To begin, new supplies are limited. In addition, most of the new supply is used up rather than stored. While millions of gold ounces can rush to market whenever prices rise, most PGMs are consumed and cannot be recovered.

 

Russia exports more palladium than anyone else, but that mostly comes from their Cold War stockpiles, not current production, so when you combine low supplies with limited above-ground stores, any supply disruption can send platinum and palladium prices soaring – as we saw during last week’s price action.

 

In addition, platinum and palladium are primarily produced in two controversial nations, South Africa and Russia. Most of the world’s platinum is buried deep in the Bushveld Igneous Complex in the Transvaal Basin of South Africa, or in the Norilsk Complex in the Arctic north of Russia. (North American deposits are mainly found in the Thunder Bay district of Ontario and the Stillwater Complex in Montana.)

 

In 2012, South Africa mined 71.5% of the new platinum, while Russia mined 14.5% of new supplies. As for palladium, Russia mines 41% of new supplies, followed by South Africa with 36%. Between them, Russia and South Africa mine 86% of new platinum and 77% of new palladium. (Rounding out the top five sources, most of the rest of the each year’s new PGMs come from Zimbabwe, the U.S. and Canada.)

 

A New Source of PGM Demand – Exchange-Traded Funds (ETFs)

 

In addition, there is a new source of demand from platinum and palladium ETFs. Two new palladium-backed ETFs were launched in Johannesburg in late March. The total physical holdings in all palladium-backed ETFs are now 40% above the levels of two years ago: 85 tonnes now, vs. 60 tonnes two years ago. That’s almost 2.8 million ounces as of the end of May, or more than the annual new production in Russia.

 

Platinum ETFs are growing even faster, up from 41 tonnes of physical holdings two years ago to nearly 90 tonnes now. ETFs take a large share above-ground supplies off the immediate physical markets, but this is a two-way street, as we’ve seen with gold ETFs in 2013. Rapid sales of ETFs can put a damper on PGMs, but that is less likely due to the narrowness of above-ground supply in the platinum group metals.

 

Due to the political crises in Russia and the ongoing labor disputes in South Africa, production could be disrupted again at any time. South Africa loses about 10,000 ounces of platinum production and 5,000 ounces of palladium each day the workers go on strike, and they can’t make up for that production when work resumes. Even after the strikers return to work it could take months to resume full production.

Price source: Kitco; basis: London pm price fix

Meanwhile, industrial demand for the PGMs will only increase. Last month’s sales of passenger cars in China rose by 14% year over year, according to the China Association of Automobile Manufacturers. Demand is rising in the U.S., too, with most months delivering greater-than-expected auto sales growth. Both platinum and palladium prosper from this demand, since most motor vehicle manufacturers can now substitute palladium for platinum in catalytic converters, but platinum is essential in many engine types.

 

Next week (on June 24), the metals consultancy CPM Group will release its 2014 Platinum Group Metals Yearbook, the definitive annual review of statistical data on the PGMs. In the meantime, another leading metals consultancy, Johnson Matthey plc, said in their latest report that platinum consumption will likely exceed new supplies by 1.22 million ounces this year, while the shortfall in palladium supplies will reach an unprecedented 1.61 million ounces, significantly above the 371,000 ounce shortfall last year. This would mark the eighth consecutive year of deficits and the largest PGM market deficits ever recorded by Johnson Matthey, whose data on the PGMs goes back to 1980 for palladium and 1975 for platinum.

 

With supplies trending down and demand rising, platinum and palladium belong in most portfolios. At Navellier Gold, we recommend a prudent mix of gold, silver, platinum and palladium – perhaps in that order of preference – for the precious metals portion of your balanced portfolio. The PGMs are thinner markets, with more volatility, but they could be the star performers in your precious metals portfolio.

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Disclaimer: The information in this letter is not intended to be personalized recommendations to buy, hold or sell investments. This should not be considered as personalized trading or investment advice to subscribers. The information, statements, views and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication. Subscribers should verify all claims and do their own research before investing in any investment referenced in this publication. Investing in securities and other investments, such as options and commodities, bullion and futures is speculative and carries a high degree of risk. Subscribers may lose money trading and investing in such instruments.