platinum bar

Platinum “Extremely Undervalued”

December 3rd, 2015 by

platinum_bar2In the broader commodities sector, you would be hard-pressed to find a worse performer this year than platinum. The precious metal has shed more than 30% of its value thus far in 2015, its worst annual showing since 2008 when the metal plunged 39% on the year.

The cause for the losses was pretty straightforward last time around, as the world economy entered the depths of a financial crisis and a global recession. Along with the collapse in the automobile market went platinum. This time, it’s less clear.

Factors Worth Noting

It’s not particularly surprising that platinum has fallen this year, but the steep pace at which it has declined is difficult to explain.

10oz-platinum-barOne would expect platinum to follow the other precious metals lower. This is a natural dynamic. But gold and silver have only lost one-third as much as platinum in terms of percentage, so what gives? It’s true that platinum sees far less “safe haven” buying then its more familiar counterparts, but this hardly accounts for such losses.

When one turns to the use of platinum in industry, the sustainability of the low current price levels seems even more dubious. Industrial metals like nickel, copper, and iron have been getting battered in their own right this year as the Chinese economy (the world’s manufacturing hub) continues to slow. Yet platinum’s industrial use is made up almost entirely by the auto industry, where it is used in catalytic converters that reduce car emissions.

So, you’d think that auto sales must be tanking for platinum to fall so far. Quite the opposite: even after weak sales numbers during H1 2015, global auto sales are on pace for a 2% increase this year. With this in mind, a leading ETF analyst has called platinum “extremely undervalued” at the moment.

Dieselgate and Platinum

platinumWhat about the “dirty diesel” scandal that rocked Volkswagen and several other European automakers? Well, despite this setback, European car sales have been solid and the region remains the number one market for diesel engines. This ought to provide support for platinum prices—particularly if one of the solutions to the diesel scandal is the increased use of catalytic converters.

One trend may be the increased use of palladium as a substitute for platinum in catalytic converters. Although both metals get the job done, platinum is more efficient. Even if part of the decline for platinum can be attributed to greater palladium use, the Pt-to-Pd price ratio is still well below its historical average of better than 2.5:1. Moreover, the diesel problem may mean that greater platinum use is warranted.

platAs an aside, given the alarming levels of pollution in China (which is also now the world’s top consumer of automobiles), a growing market for industrial platinum could be brewing in the People’s Republic.

As a good frame of reference, after platinum’s 39% decline in 2008, the precious metal rallied an incredible 57% the following year (2009).

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.