Platinum as an Investment
Platinum has never practically served as money (except for a short period in Russia, where platinum coins were used as a regular national currency), but it is used an investment. Because it is a precious metal, platinum often trades directionally with gold. However, platinum is much more widely used in the industry; therefore, it behaves more like a commodity and it is more business cycle-sensitive than gold or even silver.
Platinum is mainly traded on the New York Mercantile Exchange (Nymex) and London Platinum and Palladium Market, which is the most important over-the-counter marketplace for platinum. The platinum market is much smaller than the gold or silver market. Interestingly, in the last couple of years the annual mine production has been smaller than demand. However, the “deficit” was supplemented by recycling and destocking.
As in case of any precious metal or goods in general, the price of platinum is determined by supply and demand. However, the price of platinum is much more volatile than in the case of gold or even silver, which results from a less liquid market. The London Metal Exchange sets the so-calledtwice a day, at 09:45 GMT and 14:00 GMT, which serves as a benchmark for pricing platinum. The current process of fixing is electronic – in December 2014 it replaced the previous fix set via telephone calls administrated by the London Platinum and Palladium Market.
Platinum Investment Reasons and Drivers
Platinum is a precious metal, so it is believed to be a safe-haven or inflation-hedge similar to gold. However, it is not completely true. There is often positive correlation between gold and platinum prices (especially in the long term), however, in times of economic uncertainty the price of platinum tends to decrease in relation to gold. The best example may be the financial crisis which started in 2008. Prior to the stock panic of 2008, platinum was traded at a significant premium to gold. However, since then the platinum to gold ratio has been declining and now is trading significantly below parity (as of February 2016). It shows that platinum is an industrial commodity rather than a safe-haven as gold. The platinum to gold ratio is a useful indicator of economic confidence among investors.
As platinum is an industrial commodity, its price is influenced by the level of business activity and industrial demand. Since platinum is widely used for catalytic converters, its price largely depends on the situation in the automotive industry and vehicles production (especially in Europe, because there are more cars with diesel engines). Platinum prices are also affected by the price of palladium (its main substitute used in the automotive industry) and supply factors, especially the mining production. Since its production is concentrated in unstable emerging markets, the price of platinum is prone to price spikes due to production stoppages. Platinum prices are much more volatile than the gold or silver prices (due to lower liquidity), therefore platinum is a much riskier investment.
Platinum Investment Vehicles
There are many ways to invest in platinum, however, fewer than in the case of gold or silver. Investors can purchase bullion bars or coins, however, there is less diversity and the margins are higher compared with gold or silver markets (the platinum market is less liquid). Investors can also purchase platinum exchange-traded products or platinum certificates to avoid the risks and costs associated with the transfer and storage of physical bullion (although platinum is more dense than gold, therefore, it occupies less space). Investors can also invest in platinum via derivatives, such as futures and options. Generally, investors should remember that the platinum market is rather illiquid; therefore, it is not always easy to exit from an investment at a satisfactory price. The indirect way to have exposure to the price of platinum is buying the shares in platinum mining companies. However, investors should remember that the production of platinum is centered in South Africa, where stoppages often occur.
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