Personal Finance

How platinum got cheaper than gold

Rajalakshmi Nirmal | Updated on January 23, 2018 Published on October 25, 2015

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Growing supply and slowing demand are weighing on the price of the metal



Looking for an engagement ring or stepping out to buy a wedding band? You no longer have to restrict yourself to the boring yellow metal; the classy platinum in now within reach.

Prices of platinum have been declining steadily and are down about 50 per cent over the last four years. The best part is, platinum is now cheaper than gold. Platinum trades at about $1,000/ounce while gold quotes at $1,164/ounce. It moved to a discount to gold in February.

Platinum has always sported this exclusive aura and commanded a premium because it is rarer than the yellow metal. But sometimes, due to unfavourable demand-supply dynamics, the metal trades cheaper for months together. For instance, when platinum prices moved to a discount to gold in 2011, it took 16 months for it to recoup its premium to the yellow metal.

Of the several issues that have been hurting the metal’s price, the most recent has been the Volkswagen’s emission scandal. The German automaker was found to be using a test-evading software on its diesel vehicles to bypass pollution tests in the US. Platinum derives over 40 per cent of its demand from auto catalysts, which are devices that curb pollution from diesel cars. The 11 million cars of Volkswagen which faked the emission control test are estimated to have used about 1.8 million ounces of platinum. This formed a chunk of the annual demand for platinum that ranges between 7 and 8 million ounces.

The Volkswagen scandal hurt sentiments and investors began shorting platinum futures fearing that diesel cars will lose market share to gasoline cars. About 3 per cent cars in the US and 50 per cent in the Europe are powered by diesel engines.

While the pessimism over diesel cars may subside, the bigger worry for this enchanting metal is the growing supply and slowing demand.

Increasing supply

Last year, a strike by mine workers in South Africa — the country which accounts for 70 per cent of the global mine output, hit platinum supplies. But in 2015, mines’ supplies have recovered.

In the recent June quarter, the World Platinum Investment Council says that the global platinum deficit shrank  by more than 65 per cent to 55, 000 ounces, thanks to increase in mine supply (up 12 per cent over the March quarter) and a small increase in recycled platinum jewellery.

What helped boost mine output is the improved operational efficiency of miners due to a weaker rand. The South African rand has fallen about 12 per cent against the dollar this year. The country’s miners have thus seen costs reduce substantially. So, despite lower platinum prices, miners have been increasing output as the strong dollar has improved their margins. Platinum supplies from South Africa are likely to climb nearly 20 per cent this year, the largest annual gain since 1993, according to estimates by Johnson Matthey Plc.

Thin Chinese demand

Besides excess supply, weak demand is also weighing on platinum. In fact, the rout in the South African currency was triggered by fears of an economic slowdown in China. South Africa and China are trade partners. The dragon country imports significant amounts of coal, iron ore, copper and platinum that are mined in different parts of South Africa.

With China seeing a deceleration in growth, demand for the resources of South Africa, including platinum, is withering. In the June 2015 quarter, while platinum supply grew in double digits, its demand, mainly from the automotive sector and jewellery, declined. Consumption demand, as represented by those buying jewellery, was down by a sharp 11 per cent.

Until the 2008 recession, European auto catalysts made up for most (about 25 per cent) of the demand for platinum — at about 60 tonnes on an average annually. This was double the demand from Chinese jeweller. But by 2012, Chinese platinum jewellery demand grew to an annual 60.7 tonnes (accounting for a fourth of the total demand) while European demand for auto catalysts fell to 41.8 tonnes.

Today, China still continues to dominate the platinum market. Over two-thirds of all the demand for platinum jewellery is from China.

Though the leading retail jewellery chains in the country such as the Chow Tai Fook are expanding, footfalls have not been growing. This behaviour of the Chinese consumers is in contrast to 2009, when they had doubled their purchase of platinum jewellery even as the metal price crashed sharply. India is the fourth largest consumer of platinum jewellery.

Retailers are betting big on the growing preference for light weight platinum jewellery by younger women.

But given that 60-70 per cent of the jewellery demand in the country is from weddings, and people still look for gold accessories to adorn on family occasions, demand for platinum is relatively small.

It is not just platinum, but other precious metals such as gold and silver have also been in a bear market for the last few years.

Slammed by dollar

This can be explained by only one factor — the US dollar.

Prompted by expectations of rate rises in the US, the dollar has been rallying sharply. If rates go up, it would be more attractive for investors to put money in bonds and other interest bearing securities rather than in platinum or gold. Demand for platinum coins/bars and ETFs fell by 80 per cent in 2014 and made up just 2 per cent of overall demand for the white metal.

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Published on October 25, 2015
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