Frustration as platinum locked in discounted price pattern to gold

THE downbeat sentiment towards platinum that has kept it trading at a correlated discount to gold was “frustrating”, but increasingly influential investors would begin to see the fundamental market argument for the white metal, said Trevor Raymond, head of research for the World Platinum Investment Council (WPIC).

“For 40 years prior to 2011, platinum traded at a premium to gold for 82% of that time. After 2011, many investors have felt disillusioned, so those that once reliably traded in the platinum base have dwindled,” said Raymond in an interview.

The price of platinum began 2011 at about $1,840 per ounce, but it ended the year some $400/oz weaker and then continued to fall in value to current levels of sub-$800/oz. The metal is currently trading at about $791/oz.

“Today, those who are trading in platinum in the short-term are also trading gold. I can’t say they don’t believe in the fundamentals, but they do trade on things that can be trusted so when there’s dollar strength, the gold price reacts in a predictable way,” he said. By implication, so does platinum – a correlation the WPIC hopes will break.

Platinum has industrial applications on a scale proportional to its market size that gold does not have – a characteristic that is currently working against platinum given the perceived threat to its usage posed by electric vehicles. Platinum is used heavily in diesel and petrol-based automotive autocatalysis.

Raymond was commenting ahead of the release of the WPIC’s Platinum Quarterly today in which it adjusted its outlook for 2018 saying that platinum supply and demand would both fall about 2% during the period leaving the market in an overall surplus. (Details below).

“Today’s report shows that the global platinum market faces a number of key challenges to both supply and demand,” the WPIC said in its Platinum Quarterly summary for the second quarter of this year. “As we have remarked in the past, supply remains constrained and we expect this to remain the case for the foreseeable future,” it said.

“An encouraging increase in industrial demand cannot mask a disappointing, but anticipated, fall in demand from the automotive sector,” it added. Investment demand – the stimulation of which is the WPIC’s chief mandate – was also sluggish in the second quarter, although the expectation is that this will revive later in the year.

Said Raymond: “The frustration is that we are speaking to funds that do see that platinum is undervalued, and that the price is completely unrelated to platinum market. However, I’m comfortable that we are getting more meetings,” he said of the WPIC’s efforts in shining a fresh light on platinum in the hope long-term investment positions will be taken for its long-term market fundamentals.

Raymond added, however, that investors want to see significant changes in the market. “They want to see Lonmin close or some new form of demand that will make a one million oz difference. As traders, they won’t bother about small moves on the fringe,” he said.

Key features of WPIC Platinum Quarterly:

  • Global platinum supply is forecast to slip by 2% year-on-year (-150 koz) to 7,910 koz this year as total mining output falls by 3% (-155 koz) to 6,015 koz, while recycling is marginally higher (+5 koz) at 1,895 koz.
  • Most mining regions are expected to have lower refined production in 2018 with declines being seen in South Africa (-50 koz), Zimbabwe (-20 koz), Russia (-40 koz)
  • Autocatalyst recycling is projected to increase by 5% (+60 koz) to 1,385 koz. This gain just outweighs a 10% decline in jewellery recycling (-55 koz) to 505 koz.
  • Global platinum demand is forecast to fall by 2% in 2018 to 7,615 koz, as lower automotive (-210 koz), jewellery (-15 koz) and investment (-15 koz) demand outweighs an increase (+90 koz) in industrial usage.
  • With both supply and demand dipping by 2% this year, the market is projected to have a surplus of 295 koz.