- Platinum Prices May Depend Upon What’s in Your Garage

While the price of gold tends to attract headlines, many investors seek exposure in other precious metals including platinum. This dense, malleable, ductile, gray-white transition metal occurs in some nickel and copper ores along with native deposits. Platinum resists corrosion and is used in jewelry, laboratory equipment, electrical contacts and electrodes, platinum resistance thermometers, dentistry equipment, and catalytic converters.

The platinum supply is limited and platinum market fundamentals are very tight. While demand has been continuously increasing, sources of platinum production are scarce. More than 90% of world platinum production is concentrated in just two areas in South Africa and Russia, and there are not more than ten significant platinum mining companies in the world. It is estimated that new mine production is only about 210 tonnes per year.

Realized volatility of common platinum instruments generated using the RiskAPI Add-In.

Platinum bullion has the ISO currency code of XPT. Platinum is a commodity with a value that fluctuates according to market forces. As of 1 October 2009, platinum was trading at US$1,285 per troy ounce. A five-year chart of platinum prices will reveal tremendous volatility beginning in April 2005, when the price began its climb to a high of $2,252 in March 2008 from an historic plateau of $1,000. This was followed by a plunge to $774 by October 2008. During the first three quarters of 2009 platinum has fluctuated between $1,345 and $1,089, a nearly thirty percent swing.

Realized volatility-over-time of spot platinum from Jan 2009 to present generated using the RiskAPI Add-In.

What’s in store for platinum investors? During the past decade the global demand for platinum has consistently outgrown supply, and in the near future platinum demand in most sectors including jewelry and industry is expected to remain tied to the global economy. But savvy investors are carefully watching the automotive industry. Platinum is a key component in the manufacturing of the catalytic converter, the device first introduced in 1975 to cut emissions from gasoline engines. Millions of catalytic converters have been manufactured, but its days may be numbered. The source of future price volatility is the fact that platinum is a key component in hydrogen fuel cell technology, which may be embraced by the auto industry. But electric technologies, including all-electric and hybrid vehicles, don’t need platinum.

Correlations of relevant precious metals, indexes, and currencies to spot platinum generated using the RiskAPI Add-In.

If the auto industry moves toward battery-powered electric vehicles, demand for platinum will ease, driving down prices. If hydrogen fuel cell technology takes off, then so will demand for platinum. But it gets more complicated: historically, expensive materials often get replaced by newer, cheaper substitutes, the way polyester replaced cotton and plastics replaced steel. If auto makers can drive down the cost of fuel cell technology by replacing the platinum with something else, demand will drop.

In the future, one way for platinum investors to evaluate price volatility may be to take a stroll down to the local Chevy or Toyota dealer and see what is on the showroom floor.

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