platinum vs gold for 2009

Interesting article from mineweb...personally I reckon both will do very well.



Platinum or gold - which will be the better performer in 2009?

The platinum's price's brief dip to a discount to gold between the 12th and 17th December, for the first time since December 1996, did not last long and a premium has rapidly been re-established, reaching $130 just three weeks later. This is small beer by comparison with the $1,288 chasm that was reached on 3rd March 2008. Is there further to go or will gold keep tabs on its white competitor?

Author: Rhona O'Connell
Posted: Wednesday , 07 Jan 2009

LONDON -

The fundamentals behind gold and platinum are totally different, the two only being classed as "precious" metals because of their common link through the jewellery sector and investor interest in coins and small bars (and, in principle, ETFs, although they cover such a wide range of asset classes that this does not really count). Platinum should perhaps more accurately be termed "strategic" rather than precious since it has no real history as a currency and it is not really a store of value; however since it enjoys private investor and jewellery interest this sector is probably a sensible place to start when making the comparison with gold.

Over the past ten years jewellery and small bars have absorbed an average of 76% and 7% respectively of gold physical demand - prior to any other investment or ETF activity. Recent high prices have put some pressure on this demand, which dropped from 83% of total (2003-2005) to 80% in 2006-2008; furthermore in the past three years bar purchases have increased their market share at jewellery's expense as some market purchasers - especially in Asia - have bought bars in times of high prices with a view to subsequent fabrication into jewellery.

In the platinum market, GFMS estimates for jewellery suggest that it has accounted for an average of 31% of total demand while Johnson Matthey figures suggest that investment bar demand, which is incredibly volatile, has averaged just 1% of platinum purchases over the period (but possibly up to 4% last year).

Preliminary estimates for 2008 suggest that jewellery plus bars accounted for just over 2,400 tonnes or almost 80% of gold physical fabrication+bar demand, and roughly 35 tonnes or 15-16% of platinum demand.

The advent of the Exchange Traded Funds have added some spice to these markets and as it is difficult accurately to quantify Over the Counter investment demand, at least looking at ETF changes will give us an idea with respect to investor (and to a lesser extent, speculator) interest in the physical market.

To this end the major gold ETFs and ETCs had absorbed 1,174 tonnes of gold by the end of last year, of which 2008 was responsible for 302 tonnes. So, if we take fabrication, bars and ETFs all together then they accounted for 81% of total gold offtake (excluding Over the Counter activity), while the percentage of platinum interest increases to 16-17% on the back of just over three tonnes' net demand for platinum in the London ETC and the Zurich ETF.

The value of gold absorbed into the jewellery market in 2008 was therefore between approximately $50 and $60 billion last year, while the value of the platinum that went into jewellery was much lower at somewhere around $1 billion.

What this all means in terms of market dynamics is that the shift away from platinum jewellery towards gold (and palladium), especially in China, as a result of the price differential between the two metals has a far more deleterious effect on the platinum sector than its equivalent benefit to the gold market. This is pretty obvious, but of course it also suggests that the converse is true and that the massive contraction in the price differential between platinum and gold over the past nine months has set the scene for a revitalisation of the platinum jewellery market - at least in relative terms, given the state of the world's economy - and this should give platinum prices something of a boost.

It looks at first pass as if this has already happened, but nothing is ever that simple and this is where the automotive industry comes in. Platinum, whose demand is, along with that of palladium dominated by the auto sector with 55-57% of market share in each metal, has been suffering under the persistent deterioration in the auto market and the way in which this has spread around the globe. Given that environmental restrictions continue to tighten and the fact that the market for fitments is not fully mature, platinum demand in this sector is holding up better than auto production and sales figures themselves, but the frequency with which auto numbers are released has meant that the fate of the sector has been seen as hanging over platinum like something of a Damocletian sword.

Until now, that is. Or at least, for the time being. The market's anticipation of a stabilisation, if not a recovery, in the condition of Detroit's Big Three has combined with a growing optimism over implementation of the tax incentive scheme planned by the incoming Administration of President-elect Obama and these two factors between them have been helping to support platinum; the fact that the latest figures showed a 36% year-on-year drop in US light vehicle sales in December did not actually do much to stifle platinum's recovery and the price has since then flirted with $1,000/ounce.

This is a 31% increase in price form the late October low of fix of $763.000, although it is only a 16% retracement of the fall from the high to the low.

Gold is a completely contrasting story. Gold's price fall was smaller proportionally than that of platinum, at just 30% against 66%, while its recovery from the $712.50 low in late October to prevailing levels of $866 means that it has regained just over 50% of its losses.

These are the basic numbers and as they stand they suggest, very simply, that platinum has a much better percentage upside than gold. Whether this actually transpires will depend on any number of fundamental factors, including the following:

To what extent is the market discounting or over-discounting a recovery in the auto sector, in the US in particular?
To what level will the relative fortunes of the jewellery markets help to sustain an outperformance by platinum over gold?
When will the global economy start to stabilise and at what point does the market start to fear systemic inflation risks?
Any other numbers of ingredients can be poured into this particular mix, but these are some of the major factors. This piece is not designed to express a view, beyond the fact that both of these metals will do well this year - but probably at different times...