As you can see, gold has massively outperformed platinum in the past 11 months or so. However, it appears to me that momentum to the upside in this ratio may be waning. Notice the RSI at the top of the chart -- there is clearly negative divergence there. Slow stochastics have been overbought since late April, but have recently crossed below 80, with a bearish %k/%d cross as well. Another indicator on the chart is the 600 weekly moving average. The fact that the ratio is currently 1.11 and the this very long term average is 0.61 suggests that this price action this year is extraordinary in the context of the past eleven and a half years of trading. All and all, this chart looks tired to me and a test of the trendline may be coming up shortly.
The uptrend shown here is in part reflective of a weakening of global economic growth and a lack of confidence in the financial system. Jitters in the global financial system in 2011 due to the European sovereign debt crisis and also the debt ceiling fiasco in the fall led to a flight to the ultimate currency, gold. Additionally, high energy prices brought about by the 'Arab Spring,' the problems in Italy/Spain/Portugal etc, the disaster in Japan, monetary tightening in China, and the ongoing malaise in the US housing market contributed to economic weakness globally in 2011. The combination slower global growth (bearish for platinum) and distrust of the financial system (positive for gold) drove the price action in the metals for much of 2011.
While I'm not sure if stresses on the financial system and economic weakness will continue in 2012, there are signs that the drivers of gold outperformance relative to platinum may be abating. Below, I'll examine some short term technical trends and discuss the bullish longer-term fundamentals for platinum.
Here is a daily view of the 1-month London Interbank Offered Rate (LIBOR):
Notice that the LIBOR, which is the average interest rate that banks in London charge when lending to other banks, has plateaued in the past three and a half weeks and fell today. A rising LIBOR suggests stress/fear/lack of liquidity in the banking system. The rate rose steadily from the beginning of August through late December. If the LIBOR continues to fall, that would suggest to me that the stresses that were plaguing large financial institutions in the fall may now be abating.
Now I'd like to re-visit a chart I showed previously, the XLF:
It is up 6.62% YTD and may be telling a similar story to the LIBOR chart above.
Finally, a glance at China where the Shanghai Composite is up 3.48% YTD as of 1/11/12's close:
This could easily be just another bounce that stops at the 50 day MA and sputters out. However, if China is serious about loosening monetary policy, and/or if China decides to weaken the yuan, this rally may have legs.
Link to Bloomberg article <---
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While news, technicals, HFT robots, and manic depressive traders may influence price in the short-term, in the long run the fundamentals exert themselves. Although platinum does have some history as money, it is first and foremost an industrial precious metal. This is in comparison to gold, which is primarily a monetary metal the majority gold supply goes to investment and jewelry.
Platinum Supply Fundamentals
- Total refined platinum supply (mine output + recycling) was 210 metric tons (MT)
- Total supply exceeded fabrication demand by 8.64 MT, but this was offset by a 15.6 MT increase in platinum held by ETFs
Total mine output in 2010 was 177.18 metric tons, of which South Africa accounted approximately 80%. Overt government support for labor in negotiations with the mining industry, threats of nationalization and higher taxes are emblematic of increasing calls for higher social rents in mining in South Africa. As mining is a capital intensive business, this type of activity naturally leads to decreased capital expenditure investment by miners thereby reducing their capacity to maintain, let alone grow, mine supply. Furthermore, electricity costs in South Africa are rising (up 25% YoY in 2010) and the country is facing electricity shortfalls.
In Zimbabwe, the story may actually be worse than in South Africa. Calls for Black Empowerment by the infamous Robert Mugabe make foreign ownership of and investment in mining properties nearly impossible. I don't expect a significant increase in mine supply out of Zimbabwe any time soon.
Russia (Norilsk Nickel) is an important source of platinum and Russia has their act together more so than South Africa and Zimbabwe when it comes to friendliness to foreign investment. However, Norilsk is faced with a different problem: declining ore grades. Total platinum production in 2005 was 23.36 MT, in 2010 it was approximately 21.10 MT. Mining activity has been going in this area for more than 70 years.
Platinum Demand Fundamentals
- Automobile catalyst demand grew 12.6% YoY to 87.88 MT
- Platinum demand for use in electronics grew 15.5% YoY to 8.65 MT
- Demand for platinum in chemical-and petroleum-refining catalysts surged 11.4% to a record 16.4 MT
- PPLT the platinum ETF accumulated 12.1 MT
While the economies of the developed world in mired in a slow-growth malaise, the emerging world continued to grow. Auto sales in 2010, for example, soared by 12.5% to 74 million vehicles, spurred by 18 million vehicle sales in China. Investment demand was firm, and jewelry demand actually declined to 53.86 MT from 65.2 MT the year previous.
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I'd like to show the Gold/Platinum ratio chart once more:
As the Panic of 2008 eased in March 2009, platinum outperformed gold until April/May of 2010. Some of the fear premium came out of gold then, as perhaps it is now. China and the United States goosed growth with massive fiscal and monetary stimulus boosting industrial production and end usage of platinum. While global auto sales growth may not have been as robust in 2011 as it was in 2010, many emerging markets remain unsaturated. People around the world aspire to the standard of living we enjoy in the developed world and the automobile is central to that. Additionally, these people, quite naturally, want to enjoy all the benefits of automobile ownership while still maintaining high air quality standards. Therefore, platinum usage in catalytic converters will likely rise as countries like China, Brazil, India, Indonesia, South Korea, Saudi Arabia etc attain a greater share of the world's growth.
Central banks from the ECB to the FED to the PBoC are all loosening monetary policy at this time as a way to boost growth and/or devalue existing debt through inflation. We are in the midst of a currency war, after all. Perhaps the mini financial panic that begin late in the summer is abating and the markets are in for a period of time that resembles the latter part of 2009. Perhaps our Dear Leader central bankers can engineer robust 'growth,' and by that I mean using inflation to dress up slow to no growth. Lets not forget that the Europeans need to print to save Europe, the US is in an election year, and inflation in China has cooled in recent months.
I believe the long term supply/demand fundamentals for platinum to be compelling, and I would be surprised if it didn't regain its premium versus gold and head towards the price suggested by a 0.61 Gold/Platinum ratio. While I'm as a bullish as the next gold bug when it comes to the yellow metal, the scarcity and industrial usefulness of platinum should have it outperform gold over time. As David Rosenberg pointed out today in his note to investors, the Shanghai Composite tends to lead industrial commodities higher or lower, so that index will be key going forward.
Sources:
Investment Demand Absorbs Platinum Supply/Fabrication Surplus -- KITCO
Rosenberg Investor Note 1/11/12 -- Zerohedge
Gold to Platinum Ratio shifts -- Marketwatch
Mine Nationalization in SA a concern -- Bloomberg
Electricity Shortages in Africa -- The Economist
Palladium: The Bullish Case -- Seeking Alpha
China 2010 Auto Sales -- Bloomberg
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