Between 1987 and August 2011, platinum closed at a discount to gold on only 123 trading days out of a total of 6,413. In the last third of last year, however, the sight of an ounce of platinum trading at a discount to gold became decidedly more common. But, when last week the discount hit records above $220, a few eyebrows were raised.
The question for investors is: Does this discount represent strength in gold, weakness in platinum, or both—and for how long can it continue?
Before this latest bout of underperformance, the last time the platinum price fell below that of gold was during the depths of the 2008 crisis. As Nic Brown, head of commodities research at Natixis recounts it, "When the industrial world was falling apart, PGM prices fell sharply while gold was seen as a safe haven."
But, that only lasted for a very brief period before platinum regained the ascendency. For Brown, the recent fall in platinum prices feels quite different to 2008 and offers "a great buying opportunity in platinum for those investors who have a long-term positive view on precious metals."
UBS agrees that a platinum price in the low $1,400s looks cheap, but the bank's precious metals team points out that it is important to differentiate between the short and medium term.
In the short term, UBS says, the possibility of a short-covering rally "cannot be ignored." The reason for this they say is the sheer volume of short positions in the market.
"Platinum net longs on Nymex as of Jan. 3 sat at 1.096 million ounces (Moz), which marks very low spec exposure by historical standards. But it is the level of shorts that is more interesting—platinum shorts have risen to record levels for the past month or more; longs have been rising only slightly. Last week, shorts declined by a mere 4%, but this marks the first weekly fall since Nov. 15. And in that space of time, platinum shorts have increased by 229 Koz, or by nearly 60%. That whopping increase is too big is ignore.
"Investors started shorting platinum around $1,570 and continued down to $1,400, but the bulk of those shorts were initiated above $1,500. To our mind, the level of shorts in the market presents the best opportunity for platinum to rally. But the metal first has some work to do to get momentum climbing back towards $1,500," it adds.
While such a rally is possible, the reasons behind it are technical in nature, as opposed to fundamental, whereas, over the medium and long term, those fundamental reasons are important if one is to understand why platinum is trading so weakly, and where it might go from here.
According to Matthew Turner of Mitsubishi, the metal's recent price movements are quite easy to explain.
Between the start of 2010 and August 2011, the metal tracked global equity prices closely. This is understandable given its use primarily as an industrial metal in the auto industry. However, when global equity prices fell in August as concerns about global growth worsened, platinum continued to rise. This too, is understandable, says Turner, despite the importance of the European auto market to demand.
"A surging gold price reached parity with platinum in August," Turner says, "and then dragged it higher as traders betted platinum would remain at a price premium to gold."
This bet was also helped by the worsening supply picture for the metal developing in South Africa, which reported an 8.7% drop in PGM output in Q3, including a 27.7% year-on-year decline in October as a result of safety stoppages by the South African government.
But it turned sour however, when the safe haven trade reversed and platinum prices fell, to once again reflect more closely the outlook for economic growth and thus, auto demand.
And, herein lies the major battle that is being waged. According to UBS, "The constraints and risks of South African production remains probably the single biggest reason why current platinum prices should be regarded as cheap. Safety-related stoppages are having a much more meaningful impact on the region's PGM output."
But, while the supply side looks poor and should be helping boost prices, these factors are being outweighed by demand-side concerns about growth, particularly in Europe—whose car market is a major user of platinum—that has weighed on the demand outlook for the platinum price.
As UBS says, "We have few doubts that platinum will be trading much higher than current levels in six months from now, but for now the potential for further negative twists and turns in the wider macro environment presents too strong of a challenge for investors to rush back in."
It also points out, however, that a recession in Europe clearly "represents a threat to platinum." But then again, the European auto market hardly blazed a trail of glory in 2011, meaning that we expect another soft year for European auto demand, rather a sharp contraction as seen in 2008/2009.
As is turning out to be the case more and more frequently, it falls to the politicians to help determine where metals prices are going. If Europe manages to find some kind of solution, platinum's fundamental problems could reassert themselves in the price, but for the moment, investors remain wary.
Geoff Candy, Mineweb