Growing market volatility and global economic instability continue to bring the focus firmly back on safe-haven investments, the most prominent being precious metals, particularly silver and gold.
Platinum has underperformed all precious metals except silver since the start of the year, rallying a mere 4%, compared to gold’s 8% and palladium’s massive 25%.
Let’s take a closer look at why platinum offers investors considerable upside.
Demand continues to grow
Unlike gold, platinum has a wide range of industrial uses, accounting for 58% of total platinum demand in 2013. The greatest single demand comes from its use in catalytic converters in the automobile industry. Catalytic converters accounted for 37% of total platinum demand in 2013, with 32% coming from jewelry.
Over the last nine years, global demand for platinum has risen steadily by an average of 2% per annum over that period.
European auto manufacturing is expected to bounce back in 2014 and beyond, which will drive year-on-year growth in demand to as high as 7% annually over the short-to-medium term.
Supply shortage widens
In 2013, demand for platinum exceeded supply by 608,000 ounces or 1% and is expected to do so again in 2014 by around 400,000 ounces.
South Africa is the world’s largest supplier of platinum and in 2013 accounted for 72% of total platinum supply, but the country’s platinum production continues to dwindle. These declining supplies are being driven by industrial action and civil unrest in South Africa, resulting in declining mine production and a lack of investment in developing new or existing mines to boost platinum reserves and production.
Platinum supplies from the world’s second largest producer Russia are also under threat. Increasingly steeper trade sanctions imposed by the U.S., Western Europe, and their allies have the potential of disrupting supplies.
This will continue to exacerbate the widening gap between supply and demand, creating impetus for higher global platinum prices.
How to cash in on higher platinum prices
The easiest way for investors to cash in on higher platinum prices is to either buy the physical metal or invest in an exchange traded fund, which tracks the performance of platinum prices. The largest ETF currently available is the ETFS Physical Platinum Shares (NYSE: PPLT).
Both approaches come with disadvantages, as typically there are wide buy-sell spreads for physical platinum and there would need to be a significant rally in platinum prices for trades to be profitable for investors. ETFs typically charge a management fee, which over the long term diminishes returns and the expense ratio is 0.6% for the ETFS Physical Platinum Shares.
This leaves investors with the third option of investing in a platinum miner, which gives them leveraged exposure to the price of platinum, with a small spike in the price translating into a significant jump in the share price of miners. But this is particularly difficult because all pure platinum miners listed on the TSX are risky junior miners with projects solely in the exploration and evaluation phase.
Of these juniors, my preferred option despite ongoing disclosure and financing issues is Wellgreen Platinum Ltd. (TSX: WG), which is up 9% year-to-date. This mining junior controls one of the largest platinum deposits in the Yukon Territory in Canada, which has measured and indicated platinum resources of 330 million tonnes. But with the project still undergoing a preliminary economic assessment, any investment in Wellgreen is high risk, although the reward could be tremendous.
The other option is for investors to consider precious metals streaming company Franco-Nevada Corporation (TSX: FNV)(NYSE: FNV). Platinum group metals generate around 14% of the company’s revenue, with 24.7 million ounces of platinum group metals as reserves. Given the diversified nature of Franco-Nevada’s precious metal production, it also gives investors significant exposure to potential upside in gold and silver as well as palladium, which fellow fool Leia Klingel believes will also outperform gold.