Investors embracing platinum, palladium

David Pett, Financial Post Published: Thursday, January 28, 2010

All hail the new king in the world of precious metals: platinum

After a year in which everyone seemed to be backing the truck up for gold, investors are turning their attention to platinum, an outperformer versus gold in 2009 that continues to offer better prospects for price appreciation.

In the past month alone, platinum and its near cousin palladium have climbed as much as 12% and 15%, reaching a peak last week after getting a huge boost from the launch of two exchange-traded funds in the United States.

In the first 10 days of trading, the newly-offered ETF Securities Physical Platinum Shares (PPLT/NYSE) and Physical Palladium Shares (PALL/NYSE) have attracted more than US$500-million in assets.

"I could make a stronger argument right now for platinum and even silver than I could for gold," said Nick Barisheff, president and CEO of Bullion Management Group Inc. based in Toronto.

In 2009, platinum rose an average of almost 60% and palladium doubled. Gold by comparison added 24%. Silver, another precious metal riding tailwinds, climbed near 45%.

This year, analysts expect precious metals to keep rising, with platinum group metals and silver again forecast to outperform gold.

Platinum is expected to surge 29% to an average of US$1,553.75 an ounce in 2010, according to a new poll from Thomson Reuters.

Even better, palladium will rise 50% to an average of US$434 an ounce. Silver is forecast to jump 24% to an average price of US$18.50 in 2010, the median forecast from the poll showed, up from 2009's median price of $14.87. The economic cycle will boost demand for industrial usage.

This year is shaping up nicely as well for gold, with forecasts predicting gold will average US$1,150.50 an ounce this year, 13% above 2009's median price, according to Thomson Reuters data.

Most precious metals are benefiting from a low interest rate environment due to accommodative monetary policy, a growing U.S. deficit that is playing havoc with the U.S. dollar and lastly, the growing concerns about inflation as government stimulus fuels the economic rebound.

In addition to being used as a reserve currency in the same manner as gold and silver, demand for platinum and palladium is being aided by its commercial utility -- namely in the rebounding automotive sector that absorbs about 30% of the total world supply for the production of catalytic convertors and more recently fuel cells in electric cars.

Other applications include electronics, petroleum, glass and of course jewellery.

At the same time, supply is less bountiful and difficult to mine. Power outages that have plagued production in South Africa, where 80% of global output takes place, has exarcerbated the persistent demand/ supply imbalance that since 1997 has seen demand outstrip supply by roughly nine billion ounces.

Mr. Barisheff said the only time that silver and platinum have not outperform gold was between August and November of 2008, when "everything cratered."

But unlike silver and to a lesser extent gold, platinum can be hit by a supply squeeze at any time. "We have tonnes of above-ground gold, we've got significant production of silver, but platinum there is not much above-ground supply," he said, noting central banks around the world hold little platinum.

"With demand also growing the situation suggests platinum prices could skyrocket."

In addition to the new exchange traded funds south of the border, there are few Canadian-based funds that invest in physical platinum. Those that do, like the BMG Bullion Fund, hold equal weight in gold and silver as well.

Pure play platinum stocks are always another option for investors, however. Onno Rutten, a UBS analyst, thinks share performance in 2009 already reflects platinum price forecasts.

"Given the extent to which the stocks are discounting a recovery, against the backdrop of continued operating and earnings challenges, we retain a cautious view on the sector," he said in a recent note to clients.

His top pick in the space is TSX-listed Eastern Platinum Ltd. (ELR/TSX), rated "buy" with a $1.35 price target.

dpett@nationalpost.com