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Can Platinum compete with Gold? - Outside View by PersonalFN

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Can Platinum compete with Gold?
Sep 12, 2014

Anything that is rare quotes a premium. Rare arts, rare talent or rare metals; all have their own significance. Gold is known to be a rare metal and therefore it is a precious one. It has a history of centuries and is universally acceptable. After the meltdown of financial markets in 2008, monetary authorities in the developed world intervened aggressively. This caused debasement of currencies and gold glittered. Even India bought about 200 tons of gold from International Monetary Fund (IMF) in 2009. Now it seems, gold is losing its aura, atleast depressed prices suggest so. Platinum, on the other hand, looks attractive as compared to gold.

Recently European Central Bank (ECB) cut policy rates keeping in mind a risk of deflation to the Euro region economy. The growth indicators in Europe have been sagging. ECB has launched a new stimulus package for promoting growth in the region. Usually, such announcements trigger a rally in gold prices. But this time gold prices remained depressed. It seems the outlook for gold is not very encouraging. After all, possibility of complete winding down of stimulus in the U.S. and reviving U.S. economy are negatives for the gold.

Can Platinum compete with Gold?

Tussle between gold and platinum
Note: 1 Troy ounce is 31.1035 grams
(Source: London Bullion Market Association, London Platinum and
Palladium Market, PersonalFN Research)

Platinum is about 30 times rarer than gold. Prices of gold and platinum tend to move in the same direction. But in the past, there have been phases when platinum traded at a premium to gold and vice versa. This suggests that, fundamentals for both the metals are strikingly different. Over last 3 years, platinum has traded in the range of 16% discount to 14% premium to gold. At present platinum commands about 10% premium over gold.

Some facts about platinum

  • Unlike gold, platinum has a very brief history. It was categorised as a rare metal only in 1751 or thereabouts.

  • To produce 1 ounce of pure platinum around 10 tons of ore is extracted which is equal to approximately 6 months of mining.

  • Only two countries, South Africa and Russia account for nearly 85-90% of world's total platinum production. South Africa alone contributes approximately 75%.

  • Out of total demand for platinum, more than 50% is industrial demand. Auto sector alone is the biggest driver.
Gold Vs Platinum
  • It is clear that factors driving gold prices and the platinum prices are remarkably different.

  • Although platinum is rarer than gold, it has wide applications in the industry. In other words, there would be higher demand for platinum when global economy is doing well. However, gold shines during the period of global uncertainties.

  • Due to concentrated production, threat to supplies is higher in case of platinum. While gold is found throughout the world in different quantities.

  • Central banks have not yet accepted platinum as a significant source of reserve assets. This makes the case of platinum weak against gold which is evergreen with central banks.
Outlook for platinum

Auto catalysts used by Auto industry, especially in the Europe region and in Japan are made up of platinum. Europe follows stringent emission standards. Auto catalyst reduces the emission of pollutants. Euro 6 norms is applicable from September 01, 2014. Auto production may continue to remain the biggest driver. Unlike in Europe and Japan, China has a huge jewellery and investment demand for platinum. Therefore, the outlook for platinum largely depends on how auto industry in Europe and in Japan performs. Similarly, Chinese demand for platinum would also be a major price determinant.

Should you invest in Platinum?

PersonalFN is of the view that, role of gold as a portfolio diversifier can't be replaced by platinum despite of its rarity. As you know, for platinum to do well, economy has to be robust. PersonalFN is of the view that, equity remains one of the best asset classes to bet on economic growth. Moreover, Indians have limited alternatives for investing in platinum. Unlike Gold Exchange Traded Funds (ETFs) there are no platinum ETFs in India at present. So if you want to buy platinum, you have to buy bars, coins or jewellery. If you want to flaunt ritzy jewellery, you may still like platinum over gold. But from investment perspective, gold is more stable and dependable during depressing conditions. A point to note is that like equities, platinum too nosedived in the financial meltdown of 2008.

PersonalFN is of the view that, rather than just looking at the attractiveness of an asset, you have to look at the role an asset may play in your portfolio. This is why you need not chase an asset to earn optimum returns. You need to understand your goals, make a personalised asset allocation, invest accordingly and rebalance occasionally.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund Research Firm known for offering unbiased and honest opinion on investing.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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