PGMs outperform gold

Despite profit-taking on Friday, which set in with the opening of stock market trading in Europe and the rebound of safe haven government bond futures, platinum and palladium closed the week strongly higher. While gold managed to post a gain of 1.25%, the PGMs ended the week almost 3% up. Only the price of silver rose stronger by gaining 4.6%. Platinum traded briefly above gold for the first time since summer 2011. Now, the crucial question is, will the PGMs also perform better than gold for the rest of the year? From our point of view, this is the most likely scenario.

The prices of PGMs are expected to increase on balance in 2013 due to favorable supply and demand factors. We pointed already out that Johnson Matthey predicted in its interim report the platinum and palladium would be in a supply deficit in 2013. Also Norilsk Nickel expects that the Russian supply of palladium is going to decline as Russian inventories fell. Earlier this week, Anglo American Platinum, which is the world’s biggest producer of the white metal, surprised the market with the announcement to mothball four shafts and to sell one of its mines in South Africa. The company also plans to cut 14,000 jobs in South Africa. The decision of Amplats reflects the struggle of South African mining companies, which are faced with input costs rising three times faster than inflation, instable power supply. Also safety stoppages as well as violent labor conflicts weigh on mine operators.

While supply is likely to decline more than Johnson Matthey predicted in November, demand is expected to increase stronger. The automotive sector in Europe is in dire situation as figures showed again this week. However, more important is the global car production, which is still increasing, especially in China. The Chinese GDP grew again stronger in the final quarter of last year. This indicates that demand for cars will also increase further. Also the US economy is expanding and private consumption is one the rise. Therefore, we expect demand for the PGMs to increase and thus, the supply deficit is likely to increase due to declining production and higher demand.

One indicator to gauge the performance of platinum compared to gold is the platinum/gold ratio. A rising ratio indicates that platinum performs better than gold. However, gold shows the better performance when the ratio declines. We have developed a forecast model for the platinum/gold ratio, which is based on the same fundamental factors as in the fair value models for precious metals. A rise of the S&P 500 index as a proxy for global economic perspectives as well as higher crude oil prices have a stronger positive impact on platinum and thus lead to an increase of the ratio. Also an increase of the yield on 10yr US Treasury notes is positive for platinum/gold ratio. An increase of the US dollar index, i.e. a stronger US dollar, is negative for the price of all precious metals. However, a firmer US dollar weighs more on gold than on platinum, thus, also an increase of the US dollar index is a positive factor for the platinum/gold ratio. All the four factors are significant even at the 1% level.

In the forecasts submitted to the polls of ThomsonReuters and the London Bullion Market Association (LBMA), we predicted that the precious metals will have a positive performance in 2013. However, the PGMs are likely to perform better than gold and silver, which are more in the focus of investors and speculative traders.