Trade The Rally In Platinum
The Dynamic Wealth Report
February 25, 2008
Up 41% In 8 Weeks?
Making 41% on any investment is great. Making that same return in less
than 2 months is nothing short of phenomenal. Hedge fund managers dream
about those kinds of returns. Some savvy investors don’t need to dream. Investors in platinum have already recorded gains of more than 41% this
year. That’s right, more than 41% since the start of the New Year.
Look at the chart below. Historically, platinum was seen as an ugly
step-sister to the more popular and desirable gold. This has changed as
of late. Gold and the other precious metals are starting to share the
spotlight with platinum, especially when it started trading for more
than $2,000 per oz.
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Platinum is a precious metal rarer than gold and much harder to mine. In
fact, King Louis XV of France declared it the only metal fit for a king.
But, do we really need platinum?
The two largest uses for platinum couldn’t be more different. One major
user is the jewelry industry, the other is the pollution control
industry. Very different I know, but it is hard to argue the facts. Platinum has always traded at a premium to gold and a resurgence of
demand has been seen in the jewelry market. This precious metal has
found a special niche in high end pieces, which are often acquired by
the wealthy.
Don’t believe me about platinum’s demand in jewelry? Just ask your wife
or girlfriend . . . on second thought don’t. That may be a very
expensive question!
Amazingly, the same metal used in jewelry is also used in pollution
control. Platinum is most commonly found in catalytic converters which
reduce pollution. I won’t bore you with the details of how they work,
but know this: every gasoline and diesel powered vehicle built since the
1970s has a catalytic converter. And every catalytic converter contains
platinum. Some vehicles have several hundred dollars worth of this
precious metal.
So, why is the price skyrocketing?
Like most things, a rising price is the result of a supply and demand
imbalance. When the price of a commodity starts climbing, more supply is
sold into the market. Unfortunately for consumers of platinum, demand
keeps climbing but new supply is actually falling. South Africa, which
produces about 80% of the world’s platinum, has been hit with rolling
blackouts. These blackouts shut down the mines which reduces production.
South Africa is suffering because they don’t have enough electricity.
Because you can’t just “toss up” a 500 megawatt power plant, these
rolling blackouts are expected to continue for some time. Some mining
companies have gone as far as announcing potential reductions in the
workforce due to this issue.
The hoarding begins.
When prices rocket upwards a natural human reaction is to hoard valuable
goods. We have seen it in other commodities and no doubt we will see it
soon in platinum. Leading the hoarding charge has been a new ETF on the
London Exchange which buys and holds platinum. We have seen similar
types of ETFs here in the United States focused on gold. Essentially,
this ETF buys up the commodity and puts it in a warehouse. This
effectively removes supply at a time when it is most needed . . . . and
drives prices higher.
How do we make money?
Supply and demand for platinum is out of balance. I would expect this
commodity to continue trading higher at least in the short term. Profiting from a continued surge in platinum prices can be as simple as
buying platinum futures, but futures contracts can be risky.
For our international readers, I would look to buy the London traded
Platinum ETF (PHPT) issued by ETFs Metal Securities Ltd. For US-based
investors who don’t want to buy futures or options on futures, your only
option is to buy shares of platinum mining companies. One of the largest
I have found is Stillwater Mining (SWC).
• Coal Industry (Up 30%)
The coal industry continues its trek higher, recording 30% gains in the
last month. Analysts have been upgrading coal producers over news of
constrained production around the globe. Rising exports from the US is
also widely expected. The rally is being lead by Arch Coal (ACI) one of
the largest producers in North America.
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