Platinum Goes Ballistic; Gold to Follow? by Sean Brodrick 02-20-08
Sean Brodrick
Natural resources markets exploded higher yesterday. Crude oil closed above the $100-a-barrel mark for the first time. And platinum's move was even more dramatic ... the price soared to a record high of $2,173!
Watching platinum has been like watching a missile take off. The metal's run-up has been nothing short of astonishing — 41% so far in 2008 and about 75% in the past 12 months!
And as high as platinum is right now, some analysts are now calling for the metal to hit $3,000 per ounce by the end of the year!
I think what's happening in platinum could be foreshadowing of what will soon happen to other precious metals like gold. More on that in a moment. First ... Zoom-zoom! Platinum goes ballistic!
What's Driving Platinum?
That's the question traders and end users are asking themselves right now. Is this a short-term blowout or a long-term shift in pricing?
Robin Bhar, a respected metals analyst at UBS, recently summed up the dramatic move in platinum this way:
"It's panic, panic, panic. If you are a platinum consumer, you are not going to sleep at night. The price move shows you the unprecedented nature of the market. People can see actual physical shortages somewhere down the road and prices moving away from them. It's not a case of just speculation. There is genuine demand coming through."
Other analysts say the platinum deficit could widen to more than 400,000 ounces by the end of 2008, compared with about 265,000 ounces in 2007. The market had a surplus of 65,000 ounces in 2006, following seven successive years of deficits. Inventories are at historically low levels.
There is no doubt that the supply/demand squeeze in platinum is real! Platinum prices are fueled by inelastic industrial demand as well as from investment demand. (Jewelry demand for platinum is pretty flat, and should go down as the price of the metal goes through the roof.) External Sponsorship
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The industrial demand is for catalytic converters for diesel engines. Until very recently, platinum was the only metal that could be used for this purpose, and the number of diesel vehicles around the world is growing dramatically. In 2000, diesel accounted for only 18% of global production of light vehicles. By 2007, 24% of vehicles were diesels.
And while there is no platinum ETF in the U.S., there is one in Britain. The metal held by London-based ETFS Physical Platinum (PHPT on the London Stock Exchange) rose by 42,000 ounces in a week to 267,000 ounces — an 18% climb in just one week. If growth continues at half of this recent rate, then the ETF will hold a million ounces in the fourth quarter of 2008.
THAT is how you get to $3,000-an-ounce platinum!
There Is Also a Crisis On the Supply Side
South Africa produces about 75% of the world's platinum, and it is in the grips of a power crisis that is punishing the mining industry. Y/Y change in South African mine supply ('000oz)
The South African state power utility, Eskom, has to build enough power plants to keep up with South Africa's growing economy and increasingly plugged-in population.
Power demand has increased 50% since apartheid ended in 1994 as the government provided more homes with electricity. South Africa is also boosting infrastructure spending on roads, railways and stadiums as it prepares to host the 2010 soccer World Cup.
As a result, Eskom is now chronically short about 1.5 gigawatts of electrical generation (about 1 and a half good-sized power plants). Eskom expects the power outages to continue until at least 2013.
Eskom's solution is rolling power outages that result in about a 25% national power outage per month. In practical terms, this is a forced reduction in power usage of 10% for big users like mines. The mines were completely shuttered for five days last month!
This means on those days, the mines are unable to pump excess ground water from deep shafts while other maintenance programs are cut back. And how would you like to be a miner caught underground when random power cuts hit, stopping elevators and bringing ventilation to a halt? That kind of brown-out could lead to a deadly accident.
Bottom line: South African platinum miners were ratcheting down their production forecasts anyway, and the power outages are hastening the slide.
Sure, a lot more platinum is being recovered from junked catalytic converters. And new advances in fuel technology should allow palladium to substitute for up to about 25% of the platinum used in catalysts for diesel-powered engines.
But neither of these developments is going to completely solve the platinum crunch anytime soon. So platinum prices could go much higher.
More importantly ...
This Supply/Demand Squeeze Shows You How Quickly Metals Prices Can Soar! Here's Why Gold Might Be Next in Line ...
If $2,000 platinum is rocking the markets, imagine how shocking $2,000 gold would be? Well, we might not have to wait too long to find out.
Because the fact is, like platinum, gold has longer-term supply/demand fundamentals that are very bullish, including ...
* Global gold production fell to a 10-year low of 2,444 metric tonnes in 2007, according to Gold Fields Mineral Service. This year production will likely drop again. While China is producing more gold — up 12% — South Africa's output is falling off a cliff, down 8.1%.
* Exchange traded funds that hold gold are an important new force in the market. The most active gold ETF, the streetTracks Gold Shares (GLD), held 630 tonnes of gold at the end of January — more than the European Central Bank or China's central bank. What's more, a new gold ETF in India is planned for this year.
* The U.S. Federal Reserve is likely going to keep cutting interest rates. This in inherently inflationary — and inflation is bullish for gold. We're already seeing more inflation in the U.S., with producer and consumer prices skyrocketing. And now we're importing inflation from China. U.S. import prices reached a record high in January, up 1.7% — twice as much as had been expected.
Gold is consolidating, and its next big move could be much higher.
The best part is that gold hasn't really taken off yet. Let me explain ...
Look at the chart I made. You can see that gold is consolidating after its most recent rally. I expect we could see more consolidation before gold takes off, but, when it finally breaks out, it should rally and rally hard.
So rather than chase platinum, I would use this consolidation to add to gold positions in anticipation of their upside breakout. That way, you're in before any meteoric rise!
PGM Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
