Nick's Recommendations: Platinum finally ready for breakout

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Platinum seems ready to make its move. ETFs have added 20 tonnes to their holdings while South African wage talks later this year could break down. This would severely limit supplies since approximately 70% of all platinum mined comes from South Africa. Yet this is just one of many reasons platinum may be due to breakout very soon.

The Rise and Fall of Palladium is a tip off to get serious about Platinum.

For the past year palladium has been outperforming the other metals to a degree that was unsustainable. Platinum seems to finally be heading up while palladium sells off dramatically.

Palladium seems to have peaked at $1604 an ounce while platinum bottomed at $785 earlier this year. At its peak palladium was nearly double the price of platinum.

In mid-March palladium was as much as $743 an ounce more than platinum.

This is a huge market anomaly as palladium historically trades at 50% to 70% less than platinum. Put a different way, if platinum returns to its historical price of 2-3 times more than palladium the price could easily be over $3000 an ounce. That would be three to four times higher than it trades at today.

Many investors carefully watch the gold silver ratio but for some reason completely ignore the gold/platinum or palladium/platinum ratio. As I mentioned earlier palladium historically trades at 1/2- 1/3 the price of platinum.

On a relative basis platinum has never been cheaper. Today it is trading at roughly 60% of the price of palladium. Not even a decade ago it was over 5 times the price of palladium!

I’ve liked the outlook for platinum for several years so maybe I was early to the party. But I was also early to recommend palladium years ago at around $700 an ounce (it fell to $500 before this current run to over $1600). I was early to recommend rhodium at $1100 (it fell to $725 before making a run to $3300 recently. I can’t promise the timing is always the best nor that I can call the tops or bottoms but I can recognize trends and I clearly see when the fundamentals are out of alignment.

The fundamentals are screaming to buy platinum NOW. Historically platinum trades for roughly 35% MORE than gold. Currently platinum is 30% LESS than gold and has traded for 39% less than gold recently. Both ratios are telling us that platinum is grossly undervalued in comparison to both gold and palladium. Will this change overnight? No one knows for sure. It could happen in weeks or months or it could take another year. If you think you can time it just right, you will likely be chasing it as it goes up in price. The market action over the past few weeks could be the biggest indication the market is indeed changing as it did in 2001.

Palladium benefited from the black eye that platinum received when the Volkswagen emissions scandal occurred a few years ago. It never really made sense that platinum was completely abandoned by investors simply because Diesel engines got a bad rap. Yes, diesel catalytic converters use only platinum. Both platinum and palladium were used for gasoline engines. But remember that palladium was primarily used to save money because normally it is much cheaper than platinum.

With palladium trading at as much as $743 more than platinum it’s only a matter of time until auto makers switch back to using more platinum. Of course, that process takes time. This allowed palladium to make what might be its last great move to over $1600 an ounce before it recently dropped over $250. At the same time platinum went up nearly $100 an ounce.

Is this a coincidence or is the market giving us a glimpse of what is to come?

In 1999 to 2001 the identical situation occurred. Palladium was substituted for platinum and the price rose substantially from about $300 to $1100 while platinum stuck at the $450 range.

Within a couple of years, palladium dropped below $200 an ounce while platinum peaked at around $2200 an ounce in 2008.

The chart below clearly shows the market ratio is nearly identical today as it was in 2001 when palladium started its decline and platinum started its biggest run ever.

This chart shows the market ratio is nearly identical today as it was in 2001 when palladium started its decline and platinum started its biggest run ever.

The additional charts below show the inverse relationship as palladium crashed and platinum took off during the time period we are talking about. The market corrections the past few weeks could be the beginnings of a similar move down in palladium and corresponding move up in platinum.

Demand For Platinum

We all know that one of the main uses for platinum is to control emissions in gasoline and diesel engines (internal combustion engines). The fear has been that as the push for electric vehicles takes hold there will be fewer and fewer internal combustion engine vehicles sold, thus hurting the platinum metals group.

This may be true to a point but let’s remember I am not advocating platinum necessarily for a super long-term hold. The markets are very out of sync and I believe we are looking at a much shorter window before the price of platinum is back to normal relative value.

That said, even though the market percentage of combustion engines sold will surely decrease, the total number of vehicles will still be very healthy as emerging markets buy more vehicles. Also, it will take time, probably decades to get to a point that electric vehicles equal the number of internal combustion vehicles. The infrastructure to support the electric vehicles needs to greatly be expanded.

An all-electric vehicle uses no platinum. However, fuel cell electric vehicles require platinum group metals. Fuel cell technology has two major advantages; weight and quick refueling time.

Demand for Fuel cell vehicles is estimated to balloon to 270,000 by 2025 and over a million by 2030. Fuel cell technology has already been developed into a thriving industry with over 250 startup companies and over $20 billion in venture capital. It is used in buses, trains, ships, and long-haul trucks.

Fuel cell technology vehicles are now part of China’s New Energy Vehicle program. They have recently switched away from electric battery vehicles.

The following is an excerpt of an article FUEL CELL ELECTRIC VEHICLES IN CHINA published April 10, 2019 by The World Platinum Investment Council.

Commenting on the updated New Energy Vehicle program, Mr. Wan Gang, Chairman of the China Science and Technologies Association, a non-profit, non-governmental organization of scientists and engineers, said:

"Fuel cells have always been an important part of China’s plans for new energy vehicles, and the fuel cell era is already well underway as we see the adoption of fuel cell vehicles across the transport mix – from long-distance vehicles and public transport to fuel cell cars.

FCEVs combine the emissions-free driving of battery electric vehicles with the quick refueling times and range of a traditional gasoline or diesel car. Unlike battery electric vehicles, they also have the advantage of providing ‘high load capacity’, meaning that FCEVs maintain a consistent power output even as the load increases, for example when going uphill or towing.

Fuel cells are platinum based and will continue to create a major new demand for the metal. China’s plan alone is estimated 320,000 ounces of platinum by 2030.”

The upcoming months and years are looking very bright for platinum. These are just a few of the major reasons I believe a portion of any precious metals portfolio should contain platinum at this time.

Platinum is cheaper than it has ever been relative to the price of the other precious metals.
The price has been much too low, and platinum has been beaten up for too long over the Volkswagen scandal.
Platinum is about 35% cheaper than the price of palladium. It is usually 2-3 times more than palladium.
It is 30% less than gold but historically trades at 35% MORE than gold.
Platinum is critical for fuel cell vehicles.
Fuel cell vehicles are already in production and China has just announced a major move towards greatly increasing the production of these vehicles.