3 Reasons Platinum Could Outperform Gold in the Months Ahead

Back in the heady pre-recession days, all was right with the world. Global production was booming and precious metals prices were through the roof.

Since then, gold has punched through to reach record prices, as producers work furiously to get it out of the ground and investors continually snap up the metal on the hopes that won’t go into a freefall. [Is Now the Time to Short Gold?]

If you bought into platinum back in the spring of 2008, when it hit a high of $2,252 on the spot market, you weren’t so lucky. It was a rough ride, watching that metal tumble down to a low of $774 later in the investment doldrums of 2008. The roller-coaster is climbing the next hill, but it’s a steep one, to reach that peak again.

Platinum has recovered substantially in the past two years, and it has followed an historical trend of outperforming gold, as the pace of production picks up and industrial demand increases. Still, platinum is -25% below its record spot price.

Amid fears that the gold bubble is going to burst, some investors might wonder if platinum could be in for a similar meltdown, should gold beat a hasty retreat.

Platinum, and its sister precious metal palladium, share several traits with gold. Investors crave them and manufacturers need them for a variety of purposes. For many people, their stash of platinum is found in the catalytic converter attached to their car or truck.

Let’s look at three factors that could determine where platinum is headed in debating whether it can climb back up to those pre-recession levels.

1. Consider the source
Platinum is one of the rarest of the precious metals, often a byproduct of nickel and copper mining, with annual production of around 7 million troy ounces.

While platinum can be found in many regions including South America and parts of the western United States, South Africa is the world’s leading producer, with almost an 80% market share in 2009. Russia was a distant second, with 11%.

Relying primarily on one source for platinum is worrisome. Every miners’ strike, political tremor or other production disruption triggers a ripple in the trading pits. Labor problems in South Africa pose a real threat to the world’s supply, and the mining companies are facing increasing worker costs.

2. Consider the uses
As mentioned, platinum is needed for catalytic converters in automobiles. Current fuel cell technology also uses platinum, which unlike many metals, is non-magnetic.

While about half the platinum production is used for vehicle emissions control, about one-sixth goes toward jewelry, with smaller percentages used in electronics and other industrial uses. Some even is needed for certain cancer-fighting drugs.

Platinum’s unique properties make it popular for jewelry. Fine watches often have platinum cases, because unlike gold, it never tarnishes and doesn’t wear.

Recycling of catalytic converters is leading to the recovery of a substantial amount of platinum. But demand continues to rise, especially as China’s demand for automobiles continues to increase.

Concerns over climate change are also expected to lead to increased use of the antipollution devices in more industrial equipment. But production isn’t expected to drastically increase, in the near term, to meet the rising demand. 

3. Consider the options
As an investor, there are several options to consider. Holding the metal itself is possible, with the New York Mercantile Exchange among the exchanges trading futures and options contracts — but not practical. 

Instead, investors have taken notice of platinum exchange-traded funds (ETFs). The first platinum ETFS appeared in places like the Johannesburg Stock Exchange, but others can now be found on U.S. markets as well.

Investment demand picked up this year with the launch of the first U.S.-based platinum and palladium ETFs, the ETFS Physical Platinum Shares (NYSE: PPLT) and the ETFS Physical Palladium Shares (NYSE: PALL). Both are secured by physical bullion that ETF Securities has locked away in vaults.

Another option is the First Trust ISE Global Platinum Index Fund (Nasdaq: PLTM), which monitors the ISE Global Platinum Index, a benchmark tracking the top mining companies.

Action to take–> The global economic recovery holds the key for where platinum is going and could provide more of a money-making opportunity for investors, along with palladium and silver, than a top-heavy gold market. PPLT is heading toward the highs it saw last April, before European market turmoil entangled many of the precious metals. The fund is a good option for investors to consider, although the other platinum funds mentioned certainly merit consideration as well.