Platinum

Platinum is a fairly recent addition on the precious metals scene, and has attracted a lot of interest among investors over the last few decades. Platinum’s value is right up there with gold generally and tends to be even more volatile. Platinum is also useful as a hedge against stock market risk, where it often moves in the opposite direction.

Platinum Is An Extremely Rare Precious Metal

PlatinumPlatinum is a very rare metal, many times more rarer than gold or silver, and second only to palladium as far as rarity goes among precious metals traded as commodities.

Platinum’s name comes from the Spanish term platina, which means “little silver.” It resembles silver in appearance. Only about 130 tons are produced each year, and amount that would comfortably fit into the average living room, to give you an idea of how little we’re talking about.

So unlike gold, platinum is not kept primarily as a store of value, but instead, is primarily used for other purposes. This is due to the much higher ratio of the demand for it for non investment purposes versus its annual supply.

Over half of the platinum mined each year is consumed by industry in fact, and this demand is more basic than its use for investment or even jewelry, so we can say that industry takes what they need first and then whatever is left over can either be converted to jewelry or bullion for investment. Jewelry does take up a pretty big share of this smaller half so there isn’t that much for bullion, especially since we’re only taking a small amount to start with.

There simply is not enough platinum in the world for it to serve as a major investment vehicle like gold and silver does, and people will buy and accumulate gold and silver, especially gold, to speculate on future price increases and to use as a hedge against other investments.

Platinum does serve as an investment metal to a lesser degree though, and it is available to investors in bullion form, both in bars and in coins, similar to gold and silver, although to a much lesser degree.

While the price of platinum typically trades below the price of gold, it is solidly in second place overall in this regard, behind gold but ahead of palladium and way ahead of silver, and the all time high for platinum is actually higher than the all time price for gold, with platinum breaking the $2000 an ounce mark briefly in 2008.

Given that 2008 was during the early stages of what people term the great recession, this gives you an idea that platinum plays a role as an alternative investment to securities in bear markets. During downturns in the stock market, there is a movement away from stocks in particular, which is actually what puts their price down, and this money does need to go somewhere.

Cash positions rise quite a bit during these times, but investors are still eager to get a positive return from something, and precious metals, including platinum, become more desirable as an investment during these times.

It’s the increased demand itself that drives these upper price movements, so this is in a real sense a self fulfilling matter, and this is the case with investments in general, as they are all driven by changes in demand. When the demand rises, prices go up, and when demand wanes, prices go down.

Trading In Platinum

Since platinum is a commodity, meaning that it is standardized such that one ounce of platinum that is traded is not distinct for another, and therefore the goods are replaceable, platinum is traded both on the spot market and the futures market.

The futures market for platinum plays a significant role in platinum trading, for the same reasons that most other commodities do. The market for commodities in general is uninteresting to traders and investors, as they very often do not seek to possess these commodities, and instead they look to speculate on the future price of them, an option only available in futures markets.

For instance, if you are an investor looking to trade in pork bellies, you don’t really have an interest in pork bellies themselves, so you wouldn’t be buying this on the spot market for immediate delivery. You may trade in future contracts or options on future contracts for pork bellies though, or other commodities, with the intention of selling your position prior to the delivery date and making money on the trade by having the value of your contracts appreciate while you are holding them.

Precious metals are a little different though, as some investors do seek to hold them over time, and do buy them in the spot market somewhat, and this is especially true with gold. So a certain percentage of gold gets used by industry, for jewelry making for instance, and a certain amount may be retained in bullion form for investment.

Platinum is mostly used for industrial processes, not only for jewelry, but for things like making catalytic converters which reduce pollution in automobiles. So platinum is more like pork bellies and less like gold, and is primarily driven by industrial demand, including businesses hedging against future price increases by using futures contracts.

Investors are therefore more along for the ride with platinum futures, although it isn’t a commodity that you would never want to exercise a contract on as in investor like pork bellies. Most of the time though the contracts will be exercised by end users who are looking to acquire the precious metal for business inputs.

The Platinum Market and the Outlook for Platinum

One can purchase platinum coins or bars though, and given the nature of the platinum market, it’s rarity compared to its price, platinum may actually serve as a better investment over time than gold, and it only takes a modest understanding of economics to appreciate this.

The price of a commodity is both a function of supply and demand, and precious metals are mostly driven by the demand side of the equation, for instance with the price of gold going up during times of recession and pulling back during times of economic expansion, as the demand changes for it.

There is the supply side of things though, and while that doesn’t influence gold very much, because the annual supply is not that significant compared to all the gold in the market already, this is not really the case with platinum, as the supply does influence things more, or at least will as the supply wanes relative to the demand.

Without the influence of investors, platinum should be priced much higher than gold, based upon its much smaller supply and its dwindling supply in fact. With such a small amount mined each year, together with such a small amount above the ground, together with the higher expense of mining platinum, this should cause platinum prices to rise over time just based upon this.

Now the same thing can be said about gold but to a lesser degree, but platinum is not only rarer than gold but it should become even more rare relative to gold over time.

The price that industry can pay for platinum and still make sense of the price is somewhat limited though, and it’s investors that have the potential to drive up prices much more, but this is happening already and should continue to happen over the long term.

As more and more cars are being made though, this increasing demand will fuel higher prices, and these higher prices will likely fuel even more interest from investors looking to acquire platinum coins and bullion. The demand for platinum as jewelry may increase as well over time, as it becomes more fashionable.

Due to increased costs, many platinum mines have closed down lately, and while they may re-open, this will likely require a significant price increase in platinum. So this decreased demand in itself exerts upward price pressure.

Even more significantly perhaps, some large institutional investors are looking to acquire more platinum, as a hedge against their stock positions. Since the supply or platinum is so limited, it doesn’t take much of this major accumulation to drive the price up a fair bit.

So if investors are looking to hold a precious metal long term, platinum seems like an even better choice than gold, in spite of gold having much more liquidity and therefore easier to sell. The platinum market is significant enough though that it can still be bought and sold quite readily.

Other Ways To Invest in Platinum

Futures and options represent a way to cash in on short term price movements of platinum, either up or down, without ever even needing to take possession of the precious metal, and one may also buy platinum coins or bars to seek to take advantage of longer term appreciation.

One may also invest in platinum ETFs, and there are several out there that just deal in platinum, investing in both derivative contracts and the actual platinum themselves. As platinum ETFs become more popular, this will also serve to drive the price up.

Platinum ETFs are able to trade in platinum on both the long and short side of things, so it’s not even a matter of requiring the price of platinum to go up to make money here, as money can be made during price pullbacks as well.  Precious metals tend to be pretty volatile, and platinum is certainly no exception, and this volatility may even increase in the coming years, as it becomes more and more popular as an alternative investment.

Some platinum ETFs just invest in platinum bullion, some just invest in the platinum futures market, and some use a combination of both. These ETFs are pretty small as ETFs go, but they are catching on more and more, and can be easily bought and sold by even small investors.

They say all that glitters is not gold, and platinum certainly glitters, and perhaps in a way that will very soon surpass the glitter of gold itself.

Platinum FAQs

  • How do you invest in platinum?
    You can buy platinum from a precious metals dealer, where you can either have the platinum shipped to you, kept in their vaults for safekeeping, or they may just promise to provide your platinum to you out of their stock or by purchasing it later. You can also buy shares in a platinum ETF which will also allow you to speculate on platinum’s price declining.
  • Does platinum have resale value?
    Platinum is bought and sold both on markets and in a retail setting, and it is retail platinum that individual investors buy and sell unless they are investing in a platinum ETF. In all cases though there will be a buy and sell price for platinum, which is based upon the demand for it at the time and you can always sell it at the price being offered for it.
  • Is platinum a good investment?
    Platinum or other precious metals aren’t really good investments if we mean by investment hanging on for it over a longer period of time and expecting it to rise substantially like people do with stocks. Provided that we are buying it at a time where it may be expected to go up for a while, holding platinum can be quite profitable, but you have to pick your spots.
  • What’s better platinum or palladium?
    When comparing between things to hold to speculate on, the value of one speculative play over another will often come down to how one is performing and is expected to perform versus another. If platinum is on the rise and palladium is trading flatter, platinum would be the better investment at that time, but this all depends.
  • What is a platinum ETF?
    A platinum ETF is a fund that pools the money of its investors and uses it to buy platinum. You can buy shares in the fund which means that you own a corresponding amount of the fund’s platinum resources. Platinum ETF shares can also be shorted, and you can also invest in an inverse platinum ETF, whose share prices are inversely related to the price of platinum.
  • Is platinum better investment than gold?
    A lot more people speculate on gold than platinum, which results in the price of gold being more stable than platinum generally, although this all depends on the individual markets of each at any given point in time. There are times where platinum is a better investment and others where holding gold is better, so we need to observe and decide.
  • Why is platinum cheaper than gold?
    Prices are determined by the supply and demand for something. Platinum is much rarer than gold and therefore has less supply which in itself would cause the price of something to be higher. The demand for gold is higher than platinum though generally, which is the reason why gold trades at a higher price than platinum does.
  • Is platinum a commodity?
    Investment-grade platinum is standardized to a high purity and available in several standardized weights, which renders it a commodity due to one bar or coin of platinum being substantially similar enough to another such that they can replace each other. This allows the platinum to be readily exchanged without the need for grading as a single grade is used.
  • What is so special about platinum?
    What makes platinum so special is its rarity, and it is 30 times rarer than gold. While we wouldn’t think that this would be a desirable characteristic in itself, it is this rareness in combination with platinum’s beauty and its many industrial uses that make it popular enough to be valued at over $15,000 per pound.
  • How can you tell the difference between silver and platinum?
    Platinum appears a little whiter in color than silver and while the difference is slight it can be perceived by the trained eye. Silver also tarnishes more readily over time. Platinum is also far more expensive and therefore the price of the item may in itself be telling. Getting a metal examined by a professional is the best way to be sure which is which.
Monica

Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.