The fundamentals behind gold and platinum are totally different, the two only being classed as "precious" metals because of their common link through the jewelry sector and investor interest in coins and small bars. Because it enjoys private investor and jewelry interest this sector is probably a sensible place to start when making the comparison with gold.
Over the past 10 years, jewelry and small bars have absorbed an average of 76% and 7%, respectively of gold physical demand. Recent high prices have put some pressure on this demand, which dropped from 83% of total (2003–2005) to 80% in 2006–2008. In the past three years, bar purchases have increased their market share at jewelry's expense.
In the platinum market, GFMS estimates for jewelry 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 jewelry plus bars accounted for just over 2,400 tons or almost 80% of gold physical fabrication and bar demand, and roughly 35 tons or 15% to 16% of platinum demand. The value of gold absorbed into the jewelry market in 2008 was 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.
In terms of market dynamics, this shift away from platinum jewelry 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 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 revitalization of the platinum jewelry market.
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 numbers suggest 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 U.S. 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 stabilize and at what point does the market start to fear systemic inflation risks?
Both of these metals will do well this year—but probably at different times.