Will Platinum, Palladium And Silver Outperform Gold This Year?

March 12, 2014

So far this year gold has probably been the best performing asset class of all having risen around 12% to date.  But, within the overall precious metals sector, silver has only moved up a seemingly disappointing 7%, platinum 8% and palladium perhaps an even more disappointing 5% - despite analysts almost being unanimous in their views that the platinum group metals (pgms) in particular will outperform given the ongoing industrial action in South Africa, the world’s largest producer.

The South African situation is potentially severely disrupting supplies, while the global economy is seen as being in a recovery phase, which should indeed be a positive for the pgms given that within the Western recovery – and also with ongoing Chinese sales increasing – the automobile sector seems to be doing particularly well and that is the principal user of pgms, especially palladium.

So, in looking at the sector overall one could suggest that silver and the pgms are underperforming – but that is only relative to the gold price.  In short, even a 5% rise over the first 10 weeks of the year is actually quite a good performance – particularly relative to say the S&P500 which has risen just 2.5% over the same period.  Simplistically, the same rate of growth extrapolated over the full year would suggest the S&P500 growing around 13% and the pgms and silver growing between 25 and 50% over the period , a pretty good performance in anyone’s investment book.

But, of course, commodity prices don’t tend to grow evenly over a full year, and applying the same simplistic logic gold would be back at its 2012 record levels should it too grow at the current rate over the full year.  We see this as unlikely barring some truly major global disruption.  But the progress of the gold price will undoubtedly have an effect on that of the other three precious metals.  Yet in truth, although all three should be price dependent on industrial demand rather than on the issues which move the gold price, historically they are at least in part dependent on the price of the yellow metal, however illogical this may seem to the analyst dealing purely in the supply/demand scenario.

Let’s take the three ‘other’ precious metals in turn: 

Silver – Long considered a monetary metal alongside gold, in effect its monetary usage is nowadays minimal.  While industrial demand remains important it is almost certainly investment demand which drives the price that, in the past, has tended to rise faster than gold when gold is rising – although this pattern has not been quite so evident during gold’s recent rise – and, conversely, usually falls faster when gold moves downwards.

Silver bulls all seem to be looking for a gold:silver ratio (GSR) at a historic 16:1 (which it last reached when the Hunt Brothers were trying to corner the silver market over 30 years ago), but nowadays it mostly seems to trade on a GSR of between 35 and 70 (currently 64).  Industrial usage was hit by the sharp decline in its use in the photographic sector, but a number of new uses should see industrial demand continue rising.  However, the price still remains highly related to that of gold.

Platinum - The most affected by the South African labour situation – South Africa produces over 70% of global supply - although demand has been more limited in recent years given the autocatalyst sector for petrol (gasoline) driven engines has primarily been taken over by the cheaper palladium.  Platinum is still more used in diesel engine autocatalysts and this sector remains relatively strong in Europe, but has not taken off in the big U.S. market for smaller internal combustion engines.  Analysts had put the platinum market as being in surplus up until the initial platinum mine disruptions in 2012, at which point they saw it swinging into deficit – a position which has remained.  But a strong earlier platinum ETF investment sector saw substantial outflows as the platinum price had not been seen to move significantly upwards and stale bulls were seen offloading some of their earlier investments.  A new South African platinum ETF, however, managed to pull in a substantial amount of metal – perhaps given that South African investors are more aware of the domestic platinum mining problems.  Labour disruption there is seriously affecting mine output and, in any case, many of the traditional underground mines working the very narrow Merensky and UG2 reefs are probably not profitable at current prices and production could thus continue to decline until some of the new wide reef projects being discovered off the northern limb of the Bushveld complex start coming into production, but this probably won’t be until late in the decade.  While supply does appear to be in deficit there also does not seem to be any increased pressure on prices as a result – at least for now.

CPM founder Jeffrey Christian interviewed recently on Mineweb saw platinum demand, and thus prices, remaining pretty flat over the next two years – which suggests the price could still be dragged up, or down, by gold even if this might seem illogical for what is in reality an industrial metal.

Palladium- Arguably the most interesting of the ‘other’ precious metals, but also less dependent on South Africa than its sister pgm platinum – with Russia the largest global producer .  Here Christian, in the above mentioned interview, sees growth of 5%-6% annually as the big growth market in automobile production is for petrol driven vehicles which use palladium based autocatalysts.  With particular attention being paid to environmental pollution in some of the biggest of these growth markets – China and India, this could perhaps be an underestimate.  Christian thus sees palladium prices rising relative to platinum – but as can be seen above this certainly hasn’t happened so far this year, although palladium has been hotly tipped for price growth by many analysts.

So where do we stand now?  There are hugely mixed opinions on where the gold price will go with a number of analysts now seeing price growth ahead while others in the bearish camp are still looking for a fall to the $1,000 level given that they feel that continuing economic recovery will make gold less attractive to investors in favour of general equities.  In a falling gold price scenario one could expect platinum, and particularly palladium, to outperform gold – but in overall price terms they could still be dragged down by association should the gold price dip sharply.  But gold is also very dependent on a number of other factors – not least global politics driving people to invest in it as the traditional ‘safe haven’ which is probably a major element in gold price performance today given the Ukraine/Crimea situation.  Under these circumstances it could be gold itself which does the outperforming vis-a-vis the pgms, although all three of the ‘other precious metals’ would likely be dragged up on gold’s coattails – and in this scenario we could even see silver being the best performer of the lot.


(Courtesy of MinWeb http://www.mineweb.com/mineweb/content/en/mineweb-gold-news?oid=232467&sn=Detail )

1 cubic foot of silver weighs approx 655 pounds whereas 1 cubic foot of gold weighs more than half a ton.

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