Outsider Club

More Precious than Silver and Gold?

The Forgotten Precious Metal is Shining the Brightest

By Jimmy Mengel   

The precious metal hierarchy goes something like this...

Gold is essentially the "Perfect 10" of precious metals. It's the ancient metal of kings and a precursor for currency. Once upon a time, gold was the basis for sound money. Gold has long been a measure of wealth, and it is still coveted the world over for jewelry and as a store of wealth.

Throughout history, people have literally traveled to the ends of the earth in search of the yellow metal: European explorers and conquistadors flocking to Mexico and the New World in search of cities made of gold... American pioneers crossing the continent in covered wagons to prospect in rivers in uncharted territory... and bands of pirates crossed oceans to find and bury chests filled with gold coins.

Next up is silver. Silver is often said to be gold's ugly sister. Perhaps not as aesthetically pleasing as gold, silver is much cheaper to gain exposure to — and is quite possibly a better long-term investment than gold.

Throughout history, some 1,411,475 tons of silver have been mined (so it's not exactly "rare"), while only 161,000 tons of gold have been mined in total (enough to fill two Olympic swimming pools).

Two much rarer metals often fly under the radar: platinum and its close cousin, palladium. Platinum is much rarer than both gold and silver. So rare, in fact, that all of the platinum ever mined could fit into your living room. And palladium is even rarer than that.

Unlike gold, these metals derive much of their value from industrial uses. After watching gold and silver be beaten down over the last year, it may be high time to check out the “other” precious metals. After all, supply is tight — and only getting tighter.

The vast majority of platinum comes from South Africa, where impediments to mining it have a strong impact on the spot price. These impediments have been coming fast and furious. Last year, South African miners took part in violent protests over wages, which left dozens of miners dead and uncertainly looming large.

Since the platinum mining margins were already tight, these events pushed Anglo American Platinum to shutter four mine shafts and sell off one of their mines, killing off 14,000 jobs and causing production to take a sizable hit. According to management, they could not turn a profit, despite platinum's strong industrial fundamentals.

"The platinum business has attractive underlying fundamentals, but we are facing tough decisions to restore profitability to our operations. We must evolve to align the business with our expectations of the platinum market's long-term dynamics and address the structural changes that have eroded profitability over time," Chris Griffith, Anglo American Platinum's Chief Executive, said in a statement.

As far as price goes, it's all about supply and demand — and the demand depends a lot upon the auto market, since platinum is used primarily for catalytic converters.

Demand is likely to increase alongside the rise of emerging markets, especially in China. 

China is now the world’s fastest-growing market for automobiles. Production reached 16 million units last year, surpassing the United States as the world's largest auto producer. And the Chinese are going to need plenty of platinum for all those cars...

Platinum prices reached parity with gold earlier this year and have now settled around $1,600.

platinum price

Buying bars of platinum can be rather costly, so a more accessible way to gain exposure to platinum is with the ETFS Physical Platinum Shares (PPLT), which is backed by physical bullion.

Palladium is even rarer than platinum, and certainly less talked about.

But it may be due for a breakout year in 2013...

Palladium has been slowly replacing platinum as a lower-cost material for catalytic converters for the past two decades, since it can basically perform the same function as platinum — at 25% less cost.

“The fact that there is a very strong possibility that automakers will dump platinum for palladium is reason enough to buy the metal. The last time this happened, palladium went to the moon,” according to Annuity IQ.

Palladium hit a five-year high of about $855 last year and has trimmed back to around just under $800.

palladium

Let's take a look at all four of these precious metals and their relative strength.

From Yahoo! Finance:

In sharp contrast to the other precious metals, palladium is moving higher. The chart below shows the four tradable precious metals. Relative strength (RS) is shown at the bottom and only ETFS Physical Palladium Shares (PALL) has a rising RS line.

The palladium play in the above chart is Physical Palladium Shares (PALL), which is backed by the physical metal and stored in vaults in London and Zurich. 

As with most precious metals, buying the physical product is the safest way to ensure the metal you bought actually exists in full. However, if you don't want a shipment of palladium showing up at your door, Physical Palladium Shares (PALL) is a good bet.

If you're bullish on platinum and palladium, there's a brand-new option. Billionaire Eric Sprott has released a Platinum and Palladium (SPPP) fund that is completely backed by the physical metals.

Though Sprott has been a superstar in the gold and silver markets for years now, this is the first fund set up to deal with the "forgotten" precious metals. They are excited about the prospects.

From a Sprott press release:

If investment demand for platinum/palladium were to grow in an environment where supply is further constrained, it could indeed have a large impact on the spot price for both metals going forward.

Precious metal investors are encouraged to review platinum and palladium's unique supply/demand dynamics. We believe 2013 will be an exciting year for both metals, and that's without even considering what could happen to the precious metals sector as a whole.

The Sprott Physical Platinum & Palladium Trust now holds 81,486 ounces of platinum and 186,098 ounces of palladium in bullion form.

This is a brand-new fund, so we'll be devoting some coverage to its growth in The Outsider Club in the coming weeks.

Godspeed,

Jimmy's Sig

Jimmy Mengel for The Outsider Club

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