The recent global stock market sell-off has not spared the PGM markets. During the August-September period, from peak to trough, gold fell 15% while platinum, the rarer precious metal, fell 22%. Year-to-date to Oct. 10, gold rose 18% while platinum fell 14%. At $1,537 per troy ounce, platinum bought only 0.91 ounce of gold today, the lowest level since at least 1987, according to Bloomberg.
What has caused the different dynamics of platinum and gold? Platinum, unlike gold, has important commercial use with over 50% of demand coming from autocatalysts and 20% from jewelry demand. Shaky confidence and deteriorating economic environment, as evidenced by the 10-point drop in US ISM index from April to September, hit platinum more than gold, despite good Asian physical demand. CFTC reported as of the week ending Oct. 4, platinum net-long from money managers declined to 13,692 lots, the lowest since July 2010 while those for gold held steady. Platinum ETF demand dropped almost 10% since the beginning of August.
Have we reached a turning point for platinum? As economic outlook and demand prospects are still grim in the short-term, buyers are adopting a wait-and-see approach before jumping in the platinum market. However, platinum supply remains tight relative to gold with platinum annual supply amounting to only about 8% of total gold production while above-ground-platinum would last for about 1 year. If platinum can rebound from the range of $1,500-$1,550, industrial users such as automakers and jewelry producers should emerge as buyers, especially when platinum is cheaper than gold. Barclays analysts recently ranked the commodities by apparent vulnerability to global recession, looking at factors such as recent price changes, economic cycle linkage, speculative positions, distance to cost floor and leverage to emerging market demand. Platinum is among the five commodities least vulnerable to recession and has also experienced big price falls. In the longer run, structural support for platinum could emerge: As platinum price is approaching its marginal cost of production and cash cost is rising by about 10% per year according to BNP, supply can eventually be restricted and price supported.
Ross Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.