Forget Gold Or Silver: This Metal Is Headed For A Classic Supply-Driven Rally
If you're thinking of stashing your money in gold, think again. The yellow metal has enjoyed a nice run, posting gains for 12 years running. And it may extend that streak in 2013, particularly if inflation heats up.
But there’s another precious metal that is primed to deliver even stronger returns in the near-term. And no, I’m not talking about silver (although it too has some momentum).
I believe the big winner will be platinum, which is about 30 times rarer than gold (and far more useful). Platinum and its sibling palladium are most commonly used in catalytic converters. They are the secret material that helps turn noxious pollutants into harmless water vapor.
According to Bloomberg, global auto production will expand for the fourth straight year in 2013 to 82 million units. That’s a lot of cars and trucks hitting the roadways – almost all of them outfitted with platinum group metals (PGMs).
Toyota, General Motors and other car makers will swallow nearly 4 million ounces of platinum this year, the biggest auto consumption in six years. By itself, this uptick in demand could drive prices higher. But there’s a whole other side to this story – while platinum usage is rising, supplies are dwindling.
Most of the low-hanging, high-grade fruit has been picked. Output is expected to dip in both Russia and South Africa (which combined account for almost 90% of the world's supply). To find new platinum, miners are now digging 1.4 miles down, where temperatures can hit 160 degrees.
Now, the market is reacting to news that Anglo American Platinum (OTC: AGPPY), a major platinum supplier, has suspended activity at several South African mines.
According to Bloomberg, the shutdown is expected to shave output by 400,000 ounces this year -- equivalent to nearly 7% of the world's total production. Keep in mind, the platinum market was already in a deficit, so idling these mines will widen the supply-demand shortfall.
This time last year, I predicted a sharp rebound for platinum in 2012. And the metal delivered, posting a solid 9.8% gain for the year.
But here's the bigger news: platinum has already jumped 8% in 2013, nearly matching last year's return in about four weeks.
But I think the rally is just getting underway.
Platinum had already been trending higher to start the new year, but buyers have been even more enthusiastic since Anglo American halted production.
When a small miner scales back output, it barely leaves a ripple. But when the world's largest platinum producer throttles back, investors take notice. And this isn’t an isolated event, either -- Anglo American has endured numerous challenges coaxing platinum out of its aging properties.
Aside from the oppressive heat, South African miners have also been plagued by labor unrest and frequent power outages. Electricity shortages and worker strikes are more than just an irritation. They are ongoing disruptions that are crimping output.
But this latest disruption is deliberate -- Anglo American is downsizing its workforce and restructuring with an eye on profitability as industry costs escalate. In many places, it now costs more than $1,500 to pull an ounce of platinum from the ground. That has thinned (and in some cases erased) cash profit margins.
So I fully expect to see other platinum miners scale back and abandon their less profitable mines. That will further trim the output from what is already an undersupplied market.
If you’re looking for a beneficiary, consider the First Trust Global Platinum (NYSE: PLTM). The ETF, which tracks the performance of a basket of leading platinum and palladium producers, has bounced 19% since the beginning of December. But the fund is still well below the $20 level from a year ago, despite the underlying metals advancing to new highs.
And as I said earlier, this rally is far from over given the looming supply shortage.
Action to Take --> Keep in mind, platinum (like any other commodity) can be volatile. With that said, I still see a classic supply-driven rally unfolding in platinum this year, making PLTM one of my top precious metal plays.
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StreetAuthority LLC owns shares of PLTM in one or more of its “real money” portfolios.