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2007 platinum coins anniversary

Is Platinum Overvalued

by Trace Mayer, J.D. on January 18, 2010 · 8 comments

Reading time: 6 – 10 minutes

I like round numbers because they are easier to count.  For example, on 14 July 2009 I recommended buying platinum at $1,118 and today it trades at $1,618.  I like an unrealized gain of $500 per ounce in 6 months which translates into 44.7% in little colored coupons or 17.5% in gold.  But is platinum overvalued and how can we tell whether we should buy more, hold or sell?

VALUE CALCULATION

Commodities are produced because they add value to society.  Wheat is to eat, oil is for fuel, steel is for building and platinum is mainly for catalytic converters in automobiles.  Why is gold produced?  There are plenty of tons of it in aboveground stockpiles, decades based on annual consumption, so why burrow miles into the earth to bury it in a vault?

The value gold adds to society is in its ability to assist us in performing mental calculations of value.  When using gold as the numeraire a much more accurate assessment can be made when allocating capital.  The third round of this gold upleg is just starting.

TECHNICAL ANALYSIS

In July 2009 the platinum to gold ratio was below 1.2 and currently it is around 1.41.  The extrinsic value of platinum has risen about 17.5%, when priced in FRN$ about 45% and when compared to the earlier upleg in April platinum is looking pretty expensive.  But as Professor Jastram explained in The Golden Constant all commodities tend to return to orbit around gold.  So where is platinum’s natural orbit?

The natural orbit for platinum is around 1.8 to 2.1 ounces of gold per ounce of platinum.  But this is just a cursory technical analysis.  To be sure of one’s assertion an analysis of the fundamentals under the Austrian school of economics is also important to undertake.

FUNDAMENTAL ANALYSIS

Platinum is an extremely rare but widely used precious metal.  For example, the annual worldwide platinum mining production is valued at about $7.8B compared to about 75M ounces of annual gold production or the FDIC’s $0 of reserves and a $500B line of credit with the Treasury to cover $4,831B of insured deposits.  In other words, platinum is a lot rarer than gold and gold is a lot rarer than little colored coupons.

According to the USGS 2006 Minerals Yearbook of the 239 tonnes of refined platinum sold in 2006, 130 tonnes were used for automobile emissions control devices, 49 tonnes were used for jewelry, 13.3 tonnes were used in electronics, and 11.2 tonnes were used by the chemical industry as a catalyst. The remaining 35.5 tonnes produced were used in various other minor applications, such as platinum jewelry, platinum rings, electrodes, anticancer drugs, oxygen sensors, spark plugs and turbine engines.  Platinum uses, like uses of silver, are multitudinous.

The giant wealth destruction team headed by the Vampire Squid In Chief Obama thinks that destroying perfectly functioning automobiles, with perfectly functioning catalytic converters, is a recipe for economic prosperity.  Additionally, billions of dollars of federal funds are being directed towards the Green Economy.  What do new cars and the green economy need?  Lots and lots of platinum.

And we all know the giant wealth destruction machine known as government always buys at a good price.  As their little colored coupons continue evaporating in The Great Credit Contraction holders of capital will continue scrambling for tangible assets.  But evaporating platinum takes a lot of effort because its melting point is 1,768.3 °C or 3,214.9 °F compared to gold’s 1,947.52 °F, silver’s 1,763.2 °F and it is important to remember that paper ignites at 451°F.

Because of the rising demand for platinum from both public and private parties, the shortage of alternatives for little colored coupons, platinum’s excellent monetary attributes and the ability to easily function as currency through innovations like GoldMoney therefore the future looks bright for the silvery-white metallic element.  The same principles for buying gold or silver safely apply when considering how to buy platinum.

PLATINUM PRODUCTION

Platinum producers are extremely rare.  There have been chronic problems with open cast deep underground platinum mining in South Africa.  There is Angloplat (AMSJ.J) which produced 2.5M ounces in 2007, Impala Platinum (IMPUY.PK) which produced 1.9M ounces for year ending 30 June 2008 and is up about 50% since I recommended platinum, Lonmin and Norilsk Nickel (GMKN.MM).  Stillwater Mining Company (SWC) is the only one domestic United States platinum producer, are majority owned by the Russian Norilsk and up about 137% from when I recommended platinum in July.

With commodity producers there tends to be a leveraged effect on earnings relative to the commodity price.  Consequently, a significant rise in platinum without hedging will tend to exponentially affect their bottom line either positively or negatively.

CONCLUSION

Platinum has had a tremendous run over the past 6 months and I am pleased with the performance.  Platinum is not nearly the incredible value today as it was then and the 50dma and 200dma are not at strategic entry points.  Nevertheless, it is a prime substitute for little colored coupons, goes into the cash portion of the balance sheet, is easily purchased with low margins, is extremely rare relative to the other precious metals, has bright demand prospects and still appears to be undervalued relative to gold by about .4-.7 ounces of gold per ounce of platinum.

So I recommend doing what I have done since being bitten by the platinum bug:  accumulating fully paid for physical metal on a consistent regular basis.  While I have not exchanged my gold or silver for platinum, largely because of tax considerations, I have shunted most of my gold and silver demand into allocated physical platinum.  After all, platinum, like gold and silver, can never become worthless.

DISCLOSURE:  Long physical gold, silver and platinum with no interest the problematic SLV or GLD ETFs, the platinum ETFs or in the Angloplat, Impala Platinum (IMPJ.J), Lonmin and Norilsk Nickel (GMKN.MM) or Stillwater Mining Company (SWC).

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8 comments

ABOUT THE AUTHOR: Trace Mayer, J.D., author of The Great Credit Contraction holds a degree in Accounting, a law degree and studies the Austrian school of economics. He works as an entrepreneur, investor, journalist and monetary scientist. Follow him on Twitter. This is merely one article of 241 by .
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{ 3 comments… read them below or add one }

1 Julius Adams January 18, 2010 at 7:03 pm

The Dialog box that appears when exiting your site takes some time to load up and is very annoying. Im sure that you could place that at the end of the message just as easily.

Thanks
Julius

2 CC January 19, 2010 at 9:52 am

Another good piece.

I was just talking to my old man the other day about entities we can ‘trust’ vs. real assets we can ‘hold in our hands’. Well, I’ve come to deduce that conversations we had 20 years ago regarding ‘what would happen if…’ are coming much more into focus now. I think Trace’ disclaimer at the end of every article seems to have more & more relevance with each passing day.

See, one can ‘invest’ all he wants, dollar-cost average all he wants, ‘diversified portfolio’ all he wants, etc. In the end however, the typical (and even many non-mainstream) investors forget a very important factor:

Most of their investment decisions are based upon the premise that we live in a society (and its government) that will hold to and honor the tenets of Constitutional Liberties. I would wager that premise is no longer valid, judging by the sheer falsification of economic data and chicanery coming out of DC and Wall Street.

Given that, how ‘safe’ do you think your ‘diversified’ portfolio really is? When the IRS can seize your bank & investment accounts with the mere click of a button, and the power of Federally licensed ‘agents’, armed with MP-5’s to carry out the ‘physical’ portion in case you ‘disagree’ with them…?

What’s that you say – ‘Kook conspiracy theory again’…?

We’ll see in short order I think.

3 Robert Happek January 19, 2010 at 7:54 pm

There is a huge difference between platinum and gold. Gold has essentially no use and that is paradoxically its main value. Platinum on the other hand has plenty of industrial uses, most prominent in catalytic converters. The reason platinum lost more than 50% of its value during the crash of 2008 is precisely because the demand for automobiles fell strongly during that time. In comparison, gold lost relatively little during that crash.

The demand for catalytic converters could fall significantly in the future for three reasons: 1) the arrival of electrical cars, 2) carbon taxes, 3) peak oil. If that turns out indeed to be the case, platinum despite its rarity could fall in price the same way it did during the crash of 2008. I do recommend that you carefully study the price charts of platinum versus gold during the past 5 years.

In the long term, these concerns are not really valid. Peak oil implies that the mining of precious metals will stop one day simply because the energy required will not be available. When that point in time is reached, all metals regardless whether precious or not will shine. The price of metals is a derivative of the price of energy. Highly refined metals can be viewed as frozen energy.

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