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Why Platinum

Why Platinum

What element is scarcer than gold, a better conductor than silver and denser than lead? The answer is platinum - the strategic metal for industries, armies... and astute investors.

Why am I so positive this strategic metal is the next hot sector for gains? Let me lay out the opportunity I see for you with investing in platinum today.

Platinum is one of six metals that make up the platinum group of metals (PGMs). The other five are: palladium, iridium, rhodium, ruthenium and osmium. Certainly, the last four are relatively obscure. Even palladium is not widely known.

All six of the PGMs have unique properties, and their value continues to expand in this age of industrial revival and high technology. But of the six metals, platinum has the greatest economic importance of the PGMs and is found in the largest quantities.

The characteristics and uses of platinum are varied. First of all, it is very rare. All the platinum man has ever mined, for example, would fit into a 25-cubic-foot room. Only about 133 tons of platinum is mined annually, compared to about 1,782 tons of gold. When you consider that it takes 10 tons of ore and a five-month process to produce a single ounce of platinum, you'll begin to understand why this metal is so "precious."

Couple with this the fact that platinum is also very profitable. During periods of strong demand or inflationary worries, for example, platinum has earned spectacular profits for owners of the physical metal or stockholders of companies that explore and mine it. When the Midas metal peaked at $850 per ounce in 1980, platinum's price broke above $1,000.

Platinum is found in a bevy of products ranging from the B-1 stealth bomber to the fountain pen. For some, PGMs are a lifesaving element, used in cancer-killing drugs, pacemakers and magnetic nuclear resonance imaging. One in four goods manufactured today either contains PGMs, or PGMs have played a key role in their manufacture.

Because of its special properties, platinum produces Space-Age materials, used by certain industries and the military. For instance, platinum is used by defense contractors in everything from artillery to aerospace. And in an age where silicon is more important than gunpowder, the Pentagon understands the vital need for PGMs. For example, both platinum and palladium are integral components in ceramic capacitors used in satellite imagery and computer weaponry.

As new applications are found, demand for platinum grows. Platinum's use is growing in fiber optics and medicine (platinum in certain compounds can inhibit the growth of cancerous cells).

Platinum's use in jewelry has been surging over the past decade and today represents 38% of overall platinum demand. An equal percentage of platinum demand comes from the automobile industry, which uses the white metal to vastly reduce carbon emissions and greenhouse gases in catalytic converters.

As the developing world continues to buy and build more cars with catalytic converters, the demand for this strategic metal will only increase. But whether the world can smoothly meet future demand remains to be seen.

The critical global usage of platinum is for car emission control, fuel cells, catalysts, telecommunications technology and cancer treatments. Over the past decade, demand for platinum increased by 60%.

Reacting to the run-up in platinum prices, mining consortiums have invested billions to increase production. So far, the results are rather mixed. Supplies of platinum from South Africa reached a record high of 4.45 million ounces in 2002 (the latest year on record), an increase of 8.5% over 2001. Both the expansion of existing operations and growing production from developing mines contributed to the rise.

But we're skeptical that South Africa will continue to see its platinum production grow. We think it is more likely that South African platinum mine growth will soon reach a zenith, and then enter into the type of decline experienced by South African gold producers.

Meanwhile, Russian platinum production is in steep decline. In 2002, output fell to 980,000 ounces, down from 1.3 million ounces in 2001.

Fortunately, North American production has risen significantly. In 2002, platinum production rose 10% to 395,000 ounces. Whether or not U.S. and Canadian platinum production will continue to grow depends on the success or failure of open-pit mining.

The fact of the matter, though, is that global supply of platinum is dominated by production from South Africa, which accounts for 80% of new mine production. And fully two-thirds of the world's new production comes from a single property in South Africa - the Bushveld Igneous Complex.

My geology professor called structures like Bushveld geologic aberrations. It's 20 times larger than the world's next largest deposit. No other animal, mineral or vegetable is as concentrated with PGMs as Bushveld.

But what is of immediate concern is that it is next to impossible to increase Bushveld's output - a troubling fact for a property that delivers two-thirds of the world's platinum, for which annual demand is increasing at double-digit rates.

The lifting of ore from the deep crevice at Bushveld is limited by deep shaft transport. In fact, as mining moves into ever-deeper layers, capacity at the property falls. The bottom line is that new shafts will have to be added - a long and expensive proposition. And that means the dominant supplier of platinum to the world is on a curve of diminishing returns.

Because platinum is such a thin market, even a temporary interruption in its production would have an explosive impact. But even without a crisis, the commodity markets have seen the price of platinum explode, with the white metal continuing to reach for new highs.

The bull market in platinum is driven by the inability of new supplies to keep up with growing global demand. Over each of the past four years, supplies of platinum have fallen short of demand. With inventories falling, the price has risen to a 24-year high, and the outlook remains extremely bullish.

Since the price of platinum is now over $800 per ounce, and the general assumption is that the long-established deep mines will be unable to meet growing demands, innovative mine executives are shifting some of their focus to large-scale open-pit operations. The same shift occurred in gold-mine operations in the 1980s, as South African deep mines became less productive.

With platinum so rare and prices so high, a few producers have been able to turn a profit with open-pit mining. Whether or not they will quickly exhaust their reserves, or slowly become unprofitable, remains to be seen. But if they have even a fraction of the success that some gold companies have had, shareholders of companies involved in this type of platinum mining will collect windfall profits.

The growing boom in China, as well as India, Russia and other developing countries will create massive demand for platinum. Long-term, that will spawn a bull market for the metal that could last for a decade or more

But despite strong fundamentals, there is some risk that platinum's high prices will hurt demand in the jewelry industry, which accounted for 42% of demand in 2002 - where there is some evidence that indicates the expense of platinum is one of its major attractions!

Also, with somewhat stronger U.S. economic figures and the dollar's weakness accelerating, it seems likely that the Fed will start to make noise about raising interest rates. When this happens, platinum prices are likely to come under pressure.

Demand from the auto catalyst manufacturers, which accounts for some 40% of platinum demand, is also likely to suffer, albeit to a lesser extent. Tighter government legislation and growing demand for diesel cars will make demand for platinum less price elastic... and it is likely to lose some market share to palladium, especially as the latter is some $1,100 per ounce cheaper than platinum.

Technically, then, platinum looks vulnerable to a correction in the near term. However, with the fundamentals set to remain tight, any decent pullback in platinum prices should be a good buying opportunity to ride the trend over the long-term.