Should Platinum Be More Expensive Than Gold?

Platinum is one of the rarest elements in the world, much rarer than gold. This is why historically the white metal has been more valuable – just think of platinum credit cards which offer greater privileges and prestige than the gold ones. However, the ‘little silver’ has recently been traded at a discount to gold, as one can see in the chart below.

Chart 1: The platinum-to-gold ratio (the price of platinum divided by the price of gold, red line, right axis), the price of gold (yellow line, left axis, London P.M. Fix, weekly average), and the price of platinum (blue line, left axis, London P.M. Fix, weekly average) from April 1990 to June 2017.

Does that imply the right moment to buy? Let’s figure it out, analyzing the supply and demand dynamics of the platinum market.

Supply

The above-ground stocks amount to about 2 million ounces, which corresponds to only about one-third of annual mining production and about one-fourth of total supply (almost 2 million ounces are recycled, mostly from end-of-life automobiles). Importantly, about 70 percent of global platinum is mined in South Africa (in particular, in the Bushveld Igneous Complex). The rest of the metal comes from Russia (12 percent), Zimbabwe (8 percent), and North America (6.5 percent). The concentration of platinum production in emerging nations implies that the white metal may be prone to price spikes due to supply disruptions. Given all the problems challenging the mining industry in South Africa (labor strikes, constraints of power, low spot price of platinum and reduced capital expenditures), the supply of “rich man’s gold” is not likely to increase meaningfully over the next few years.

Indeed, in the first quarter of 2017, the total platinum supply was 1.75 million ounces, a decline of 4 percent year-on-year. Based on that dynamic, the supply of platinum is projected by the World Platinum Investment Council (WPIC) to decline by 2 percent from 7.9 million of ounces in 2016 to 7.7 million ounces this year. The drop in the supply of the white metal is supportive for its price.