When it comes to storing value, gold and silver are high up on the investors' list. With a 5000 year history as money, gold and silver are indisputable measures of wealth and prosperity and have their place in many cultures around the world.
I have indeed been investing heavily in hard metals and stocks of metal miners for two years now after getting laid off in 2009 and realizing the supposed path to prosperity of working in Corporate America and buying various paper financial instruments wasn't such a sure thing as I thought it was.
In addition to gold and silver, I believe rare earth elements have a strong upside potential and have written about them in the past. Certain energy investments should also do well dependent upon new discoveries and supply characteristics.
I currently believe the fundamentals for Platinum and Palladium are strong enough to warrant serious investment consideration for the metals and commodities investors.
There are several factors that could impact the future price of Platinum Group Metals (PGMs). Currently, data from Johnson and Matthey show that demand for platinum and palladium are fast approaching available supply for several reasons. Jewelry and automotive demand (catalytic converters) are the primary demand factors for the white metals.
The primary producers of PGMs are South Africa, Russia, and the US, with Canada and Zimbabwe as secondary producers. It is believed by the USGS that China and Australia may have significant amounts of PGMs mostly resulting from nickel mining.
The explosion in demand for the metals for autos purchased in emerging economies has strained stockpiles. It is widely believed that Russian stockpiles are almost spent. In addition, according to the USGS, the U.S. Department of Defense’s Defense Logistics Agency inventory has been drawing down substantially from the 1990s to mid 2000s and no longer serves as an ample supply source with which to meet market demands.
Those stockpiles were used as part of the supply shown above, which means that actual production is somewhat lower than what is graphed. We are entering a period in which demand for the metals already outpaces minable supply on a yearly basis.
In addition to automotive catalytic converters, PGMs are used heavily in jewelry. Jewelry is part of many cultures and serves the additional purpose of wealth maintenance and transfer to younger generations. And even in Westen nations, jewelry can be used during hard times as a source of liquidity to get through hard times. Every time I go to my local dealer, there is a line of people waiting to sell and take advantage of higher metals prices. Therefore, jewelry and investment as shown above serve the same purpose.
It is for that reason, much like gold and silver, that platinum and palladium will be used by investors to store wealth as global economic crisis worsens. When people in Europe realize their bonds are worthless, they will flock to precious metals. And with gold and silver in short supply and prices quickly rising, investment will flow to PGMs as an alternative in the forms of jewelry as well as rounds and bars.
Source: Johnson Matthey
Risk exists with the world’s largest platinum miner, South Africa. The exchange rate of the Rand to US Dollar affects profitability because costs are calculated in Rand and sales in Dollars, so as the Rand rises against the dollar, profits falls for SA mining. In addition, the country faces challenges in electrical production and water supplies which directly affect the ability of the mining industry to meet planned expansion targets. This may weaken the ability of SA miners to increase supply fast enough to meet market demand already short of metals from Russian and US strategic stockpiles. It also means that as platinum supply in particular is strained, the use of palladium as a substitue will increase and bring the price of the metal closer to that of platinum.
Source: Stillwater Mining
If automotive demand falters amid worsening economic conditions, I believe that investment and jewelry demand for platinum and palladium will make up the difference and then some as available gold and silver physical supplies are exhausted. This will drive the prices for both up significantly and may bring palladium, in particular, on par price-wise with gold and platinum.