Commodity OnlineMUMBAI: In the 18th Century, King Louis XV of France declared platinum as the only metal fit for a King, in view of its rarity. Platinum's wear- and tarnish-resistance characteristics are well suited for making fine jewelry. Platinum is more precious than gold.
The price of platinum changes along with its availability, but its price is normally more than twice the price of gold. Platinum possesses high resistance to chemical attack, excellent high-temperature characteristics, and stable electrical properties. All these properties have been exploited for industrial applications. From the investment and speculation point of view, Platinum is overshadowed by Gold and Silver, but there are many reasons why platinum should also be considered a good diversifier for investments, according to Religare Commodities Ltd. The silvery-white metal platinum is also a member of the precious metals family.
Platinum supplies will fall short of consumption for a second year in 2008 thanks to rising demand from automobile sector where it is used primarily in catalytic converters and secondly because of power cuts in largest platinum producing country, South Africa. Catalytic converters that remove noxious fumes from vehicle exhausts contains an average four grams of platinum or related metals such as palladium or rhodium. According to analysts, emission legislation will drive more demand in Europe next year and support growth this year in China, Russia, Eastern Europe and Japan. Russia has several million ounces of Platinum left in its stock piles. But analysts expect sales from such stocks to decrease because of declining requirement for foreign currency.
A Hedge
Platinum is called a hedge within a hedge expressly because it behaves differently from gold: First of all, Platinum serves as a diversifier within a diversifier. The fundamental difference between platinum and gold make platinum an excellent complement to gold in investor's portfolios._ Platinum primarily is an industrial metal as gold as a financial metal. Platinum prices tend to rise sooner in the economic cycle than gold prices. Platinum prices are more responsive to changes in industrial demand for platinum, which tends to rise as economies expand, Religare Commodities said. Platinum is used in a wide variety of industrial products and applications, including gasoline, anti cancer drugs, fibre optic cables, fertilizers, explosives, paints and pacemakers. Platinum prices are more volatile than those of gold, given the smaller size of the platinum market. Thus platinum prices tend to outpace gold prices during bull markets.
Portfolio Diversifier
There are no large above ground inventories in platinum. Platinum as an Ideal Portfolio Diversifier: Platinum is an ideal portfolio diversifier because the statistical relationships between platinum prices, on the one hand, and stock prices and interest rates, on the other, are very low. This qualifies platinum as a good instrument with which to diversify one's portfolio. The ideal portfolio diversifier is one that has little to no statistical relationship with the other assets in the portfolio. A common misunderstanding is that a portfolio diversifier should have a high but negative correlation. That would make it a counter-cyclical asset, rising as the other assets decline in value, and falling back as they recover. A better way to diversify a portfolio is to find assets that have no relationship to the other assets, Religare Commodities said in a special report. Supply deficit.
Global platinum supplies weren't enough to meet demand in 2007, bad news for a market that saw record price of nearly $2300 an ounce in March. Global demand for the metal, one of the world's rarest, climbed by 8.6% to 7.03 million ounces in 2007. Supply was at 6.55 million that year, so there was a deficit of 480,000 ounces. Safety shutdowns, geological and equipment problems, and a difficult labor environment hurt platinum supplies from South Africa, cutting production from that country to 5.04 million ounces, down 260,000 from a year earlier. The deficit between supply and demand comes a year after the market saw its first supply surplus in 8 years. There was a surplus of 355,000 ounces in 2006. Jewelry demand for new platinum metal last year, net of scrap recycling, fell by 55,000 to 1.59 million ounces.
Global purchases of platinum by the auto catalyst sector climbed by 8.2% to 4.23 million ounces last year. Auto catalysts are cylinders formed into a fine honeycomb, coated with a solution of chemicals and platinum-group metals, mounted inside a stainless steel canister and installed in the exhaust line of a vehicle. Growing production of light duty diesel vehicles was beneficial for platinum use. Platinum demand was held back, to some extent, by the replacement of platinum by palladium in the auto catalyst sector. The "more price-inelastic auto sector has been substituting aggressively with palladium in the gasoline.
Platinum ETFs Platinum and palladium exchange traded funds (ETFs) are reflecting the love investors have for metals that do much more than look pretty, according to a report in Wall Street Journal. Since ETFs that hold physical platinum were launched by London's ETF Securities last year, the price of platinum has risen 52% and palladium is up 20%.
Fund companies looking to harness that growth have been launching a number of new products this year, including: iPath Dow Jones-AIG Platinum, Launched on June 24, E-TRACS UBS Long Platinum, launched on May 9, E-TRACS UBS Short Platinum, Launched on May 9, ELEMENTS MLCX Precious Metals, Launched on April 4; holds 32% platinum; 52% gold; 8% silver and 8% palladium But unlike ETFs for platinum, the ETNs don't hold the metal, which leaves the market unaffected. Instead, they buy or sell contracts in the futures market to replicate price movements. Some have noted that demand for platinum has been tapering off, driven lower by the high prices. For years now, automakers have been replacing platinum with palladium, which isn't as pricey.
Some automakers are looking to go even cheaper than that, as one mining company has developed a catalyst that uses silver for diesel-fueled engines. Fundamental factors to support prices in 2008 are Automotive demand likely to grow as emerging economies offset weak US performance, effects of high prices in early 2008 not seen yet but jewellery demand to be lower, exchange traded funds (ETF) activity may accentuate volatility, South African supply problems will impact output but this could still rise from 2007 levels, and therefore markets expected to remain in deficit. Looking ahead, the ability of the South African mining industry to stem the loss of production from its recent challenges will be "vital to the market balance.
Industry-wide platinum group metal production in 2008 will likely be "little higher" than in 2007. Johnson Matthey said it's "likely" that demand for platinum will grow in 2008, though it warned any reduction in economic growth would soften demand for industrial metals. It expects platinum to trade in a wide range from $1,775 to $2,500 in the next six months. Futures prices for platinum touched a record level of nearly $2,300 an ounce on the New York Mercantile Exchange in March. The large supply/demand imbalance in the platinum market and the extreme price volatility that's been an almost daily feature for the last three months is not sustainable over the long term. Precious metals including platinum have drawn investors seeking protection against climbing consumer prices and a weakening dollar.
Platinum Futures in MCX The Multi-Commodity Exchange of India Ltd (MCX) in June 2008 had launched a Platinum futures contract, taking cues from overseas markets where the metal rebounded on supply worries. Analysts said that the launch is appropriate considering the global supply scenario. Other analysts said the contract may remain illiquid with few trading it as the physical consumption of the white metal is low in India owing to its high price.
