Platinum market flashing mixed signals

2011-SEP-30

The platinum price has suffered significant price declines in recent weeks, along with all other precious metals – the price going as low as $1,535 per ounce this morning. Investors remain fearful about the outlook for the global economy – sentiment which weighs heavily on industrial metals such as platinum and palladium.

While platinum futures for October delivery were trading at $1,918 per ounce on the New York Comex at the end of August, the platinum price has fallen as low as $1,535 per ounce in the last two weeks. Although gold has also suffered severe pullbacks in recent weeks – which amounted to almost $400 per troy ounce – the industrial character of platinum, palladium and silver is stymming bullish developments in these markets. In addition, platinum and palladium demand is mainly due to end users in the global automotive industry. Both precious metals are used in the construction of catalysts, resulting in enormous demand fluctuations and a link to the cyclical development of the world economy. Platinum – similarly to silver – was in heavy demand from the jewellery industry in recent years, at a time that it was becoming increasingly popular among capital market investors. However, investment demand for platinum, palladium and silver has fallen recently in line with falling industrial demand.

Market observers report that the physical demand for platinum will pick up again in the wake of the precious metal's rapid price decline. Indian traders have used the fall in the gold price to stock up their inventories before the start of the upcoming festival season. Industrial end users have also increased their platinum purchases – contributing to a temporary price stabilisation at current levels. However, demand remains depressed in comparison with other periods after a fall in the platinum price. For this reason it will be very difficult to forecast whether the decline in the platinum sector has come to an end, or whether the downward trend will continue after a temporary technical rally.

Fears among investors about an escalation of the global debt crisis and the specter of another worldwide recession have resulted in gold trading at its highest premium over platinum for two decades. Gold has recently been 3% more expansive than platinum, while an ounce of gold has averaged at around 40% cheaper than one ounce of platinum since 1987, as Bloomberg data show.

This is mainly because 58% of platinum´s demand comes from the industrial sector, which is expected to be under severe pressure again in the event of a new global recession. In addition, investors in the gold sector are currently holding investments of $121.5 billion in the form of exchange-traded funds, roughly 53 times more than investments in platinum. Since the expectation prevails that the premium of gold over platinum will still be expanding in the future, and owing to the influence of industrial demand, those interested in platinum should remain cautious.