Reasons to Invest in Platinum

Platinum is a very versatile metal and is has found its way into many industrial processes and products over the last few years, and is the only precious metal whose demand is mostly driven by industry not investor demand.

Some platinum is used for investment purposes, being fashioned into platinum coins and bars, to be held by investors, but this actually only represents a small percentage of the overall platinum produced.

When you add in the fact that the production of platinum is only a fraction of gold and silver, this means that the amount of platinum available each year for investment purposes is a pretty small amount indeed.

This can be seen as a good thing by investors, as it is the rarity of a metal that makes it so valuable, where the supply is so low that the demand for it can push the price up considerably. This is exactly what happens with platinum and while it is currently worth less than gold, it has spent most of the 21st century trading at an even higher price than gold has, peaking at over $2000 an ounce in 2008.

Platinum has lost half of that during the 10 years that have gone by since this peak, and this gives you an idea of how volatile platinum can be. 2008 was in the heat of the Great Recession, and it wasn’t long after platinum peaked that the stock market bottomed, which has more than tripled its levels over the 10 year period since that saw platinum drop by more than 50%.

This does not mean that platinum is always inversely correlated with the stock market, and sometimes both the stock market and the platinum market can move together, sometimes very significantly. People assume that they move separately and often they do, but sometimes they do not, and we should never just assume a relationship between assets without properly considering the market conditions of each at every given time.

What Drives the Platinum Market

With 75% of the world’s platinum reserves, South Africa is a major player in the platinum market, and circumstances that affect the political and economic climate in this country certainly does affect the platinum market.

In particular, strikes in the platinum mines in South Africa can greatly reduce the world’s platinum supply and can cause the price to rise considerably. When the supply is reduced, and the demand remains constant, the market will equalize by settling at a higher price where the demand for platinum will be reduced enough to match the current supply.

The demand for platinum also affects this equilibrium, where if there is more or less demand for it, the price will be higher or lower.

The fact that platinum is traded on the markets can also cause demand to be less price sensitive to changes in supply, where a rising price in itself can cause investor demand to increase, in the same manner that rising prices of other financial instruments like stocks can create additional momentum.

Investors may see forecasts of changes in supply or demand for platinum being made, where the price is either increasing or is expected to, and buy platinum with the expectation of taking advantage of these moves, and this can add to the price increase by adding to demand and causing supply and demand to equalize at a higher price than it would have if not for this investor participation in the move.

Since most platinum is used for industrial purposes and not for investment, changes in this primary demand can affect the price as well. Since over a third of platinum is used by the auto industry, changes in that industry, where people are buying more or less vehicles, is going to affect things.

As we move more toward electric cars, which is expected to happen in the coming years, this will reduce the need for platinum, as platinum is used in catalytic converters which are not needed with electric cars.

On the other hand, as countries like China, where only a small percentage of the population own cars currently, continue to grow, we may expect this influence to increase the demand for automobiles and for platinum in turn, at least as long as they use combustion engines.

Platinum has many other uses though, some of which are expected to increase, like its use by the medical industry. This use of platinum has increased from virtually zero just a few years ago to 3% today, and the demand for this continues to grow.

Platinum is so versatile and so useful in so many industrial processes that we may expect this demand to continue indefinitely, even though we are already starting to move away from its use in controlling emissions. Our reliance on fossil fuels may dissipate significantly one day, but we are nowhere near that point, so a large decline in the demand of platinum generally or even from this particular use is not anticipated anytime soon.

Platinum to Reduce Overall Investment Risk

As is the case with so called alternative investments generally, financial assets aside from stocks and bonds, there are two main goals that investors seek to achieve when investing in platinum, and that is to seek capital appreciation from the platinum investment as well as looking to hedge their portfolio generally.

It may seem odd that one may choose such a volatile investment such as platinum, whose price can move dramatically at times, to reduce risk, since we could say that investing in platinum is a pretty risky affair in itself.

While stability certainly can be a positive feature of a hedge, with the relative stability of bonds being an example, or holding part of your portfolio in cash, a hedge need not have this feature, if its performance is inversely related enough to the positions you are looking to reduce risk with.

To the extent that platinum moves in the opposite direction from the stock market, which can occur, then platinum would serve as an even better hedge than bonds or cash, because the losses of your stock holdings can be offset significantly by the gains in the platinum market.

How well this tends to work depends on the circumstances though, as the platinum market is not entirely driven by investor demand, although sometimes it can drive it a lot. If there is a flight to platinum during downturns in the stock market, this tends to cause upward pressure in the platinum market, but the extent of the flight combined with other market forces, especially the primary market, is going to matter as well.

Holding positions in platinum as a general hedge, not specific to any particular need to hedge at any given point in time, with no regard to where either the stock market or the platinum market is heading, is not a particularly wise strategy, even though it is used quite often.

If the stock market is trending up, the need for a hedge is reduced, and ideally we should hedge our positions more when it is required, and less when this requirement is reduced. In the midst of a bull market for instance, you may be concerned about diversification risk, subjectively, but risk management needs to also take into account objective criteria such as market trends, and this is the more important of the two considerations.

The platinum market may or may not be trending in the direction you would like as well, so it is also wise to assess what the outlook for platinum is as well, and allow both these considerations to guide your investment decisions appropriately.

Speculating on Platinum

Due to its higher volatility, platinum can be a very good asset to speculate on. The prices of platinum can rise and fall pretty significantly, and those who seek to take advantage of these moves have the opportunity for significant capital accumulation if you are on the right side of the platinum market at the right times.

Like with all precious metals, and pretty much any financial investment, one has the ability to speculate on the price of platinum in any time frame, from the longest to the shortest. Unlike stocks though, long term holdings of precious metals, including platinum, do not do so well over the long run and are better suited to short or intermediate periods of holding.

We only have about 40 years’ history of platinum trading on financial markets, but we’ve seen the price bounce around quite a bit during the period, and like other precious metals, they don’t really do that well over the very long term net of inflation, like stocks tend to.

Therefore, if one seeks such a long term strategy, and refuses to consider strategies to time their positions, buying with the intention of holding until the need arises to sell, then platinum is not the ideal investment.

Should one be willing and able to properly time their platinum positions, looking to ride the trends that the market goes through, then platinum can indeed present some good opportunities to make money.

This is especially the case for those who are willing to go both long and short platinum, which of course cannot be achieved by just buying physical platinum, as this requires trading platinum futures or other securities that allow you to profit from price movements in either direction.

One may either use fundamental or technical approaches to looking to anticipate and predict price changes in platinum, although ultimately the story gets told on the charts and those skilled enough in using charts and indicators will find platinum to be quite worthy as far as a means to translate these skills to positive profit expectations.

This is particularly the case given that certain instruments like futures and contracts per difference allow for much greater leverage than with physical platinum, either owning it or owning shares of a platinum fund, although we must also be careful to leverage advantages and not disadvantages, because with higher leverage, we will both make and lose more money, a lot more money.

Platinum is certainly an interesting and vibrant commodity though, and even though most people focus on gold and silver with their precious metal investing and trading, platinum is at least worth a serious look as well.