Smart investors are always looking to hold commodities that offer a good return in the long run. In recent years, we have seen businesses and governments diversify their holdings from US dollar and move towards other options including precious metals like gold and silver.
Another metal that can be a good investment option is Platinum. The gold to platinum exchange rate has risen steadily in the last 5 years. In 2014, the platinum to gold ratio was at 1:1.16. It is currently trading at 1:0.69. It means that Platinum has become significantly cheaper to buy with gold today than it was 5 years ago.
Here we will review the rationale for investing in Platinum under current market circumstances.
Reasons for Platinum’s Depreciation
Platinum’s depreciation is caused due to a number of factors. First, investors are in general moving towards new or long term investments. A lot of capital has moved into digital currencies like Bitcoin and Ethereum in the last two years. The real estate market has also seen a boom in prices due to low interest rates. Investors believe that real estate is a relatively safe investment right now. This has had an adverse effect on metal prices overall and platinum is no exception.
Another reason for the drop in Platinum price is the negative sentiment. When gold prices rose sharply between 2010 and 2013, many investors also bought platinum as it was seen as a good store of value and similar to gold. Since gold is no longer in demand, the price of platinum has also gone down.
One of platinum’s main uses was as a catalytic converter in automobiles, particularly in diesel engines. Around 44% of annual platinum demand was from the auto industry. After the Volkswagon diesel vehicles were discovered to cause much higher pollution compared to other manufacturers, demand for diesel engines completely dropped. Many believe that diesel is dead now and platinum will see a drop in prices.
The third reason why the metal is down is because platinum jewellery is out of fashion with people preferring gold and silver to the metal.
The Case for Platinum Investment
One of the biggest rationales for investing in platinum is because of its supply. The metal has a limited supply compared to gold and silver. Even though more platinum is being found around the world, it is still much rarer compared to other metals. More than 90% platinum mined every year comes from two countries; Russia and South Africa.
Getting the metal out of the ground requires intensive energy and miners would be reluctant to extract it if the price is not above a certain level. The limited supply means the prices could soar if there is enough demand for platinum.
While the demand has declined in the auto and jewellery industry, new demand is growing for platinum in consumer goods. Platinum is resistant to corrosion, has a very high melting point, offers excellent electrical conductivity and very durable. Many investors believe that currency price will explode once technical innovation leads to new applications for platinum in a variety of industries.
The price of platinum against gold is at an all time low since the last century. While further dip in exchange rate is not out of question, it wouldn’t be surprising if the metal maintains its value or recovers in the next couple of years.