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I like round numbers because they are easier to
count. For example, on 14 July 2009 I recommended buying platinum at $1,118
and today it trades at $1,618. I like an unrealized gain of $500 per ounce,
or 23.1%, in 6 months. But is platinum
overvalued and how can we
tell whether we should buy more, hold or sell?
VALUE CALCULATION
Commodities are produced because they add value to
society. Wheat is to eat, oil is for fuel, steel is for building and platinum
is mainly for catalytic converters in automobiles. Why is gold produced?
There are plenty of tons of it in aboveground stockpiles, decades based on
annual consumption, so why burrow miles into the earth to bury it in a vault?
The value gold adds to society is in its ability to
assist us in performing mental calculations of value. When using gold as the numeraire a much more accurate assessment
can be made when allocating capital. The third round of this gold upleg is just starting.
TECHNICAL ANALYSIS
In July 2009 the platinum to gold ratio was below
1.2 and currently it is around 1.41. The extrinsic value of platinum has
risen about 17.5%, when priced in FRN$ about 45% and when compared to the
earlier upleg in April platinum is looking pretty expensive. But as Professor
Jastram explained in The Golden Constant all commodities tend
to return to orbit around gold. So where is platinum’s natural orbit?
The natural orbit for platinum is around 1.8 to 2.1
ounces of gold per ounce of platinum. But this is just a cursory technical
analysis. To be sure of one’s assertion an analysis of the fundamentals
under the Austrian school of economics is also important to undertake.
FUNDAMENTAL ANALYSIS
Platinum is an extremely rare but widely used
precious metal. For example, the annual worldwide platinum
mining production is valued at
about $7.8B
compared to about 75M ounces of annual gold production or the FDIC’s $0
of reserves and a $500B line of credit with
the Treasury to cover $4,831B
of insured deposits. In other words, platinum is a lot rarer than gold and gold
is a lot rarer than little colored coupons.
According to the USGS 2006 Minerals Yearbook (.pdf) of the 239 tonnes of refined
platinum sold in 2006,
130 tonnes were used for automobile emissions control devices, 49 tonnes were
used for jewelry, 13.3 tonnes were used in electronics, and 11.2 tonnes were
used by the chemical industry as a catalyst. The remaining 35.5 tonnes
produced were used in various other minor applications, such as platinum
jewelry, platinum rings, electrodes, anticancer drugs, oxygen sensors, spark
plugs and turbine engines. Platinum uses, like uses of
silver, are multitudinous.
The giant wealth destruction team headed by the Vampire Squid In Chief Obama thinks that
destroying perfectly functioning automobiles, with perfectly functioning
catalytic converters, is a recipe for economic prosperity. Additionally,
billions of dollars of federal funds are being directed towards the Green
Economy. What do new cars and the green economy need? Lots and lots of platinum.
And we all know the giant wealth destruction machine
known as government always buys at a good price. As their little colored
coupons continue evaporating in The Great Credit Contraction holders of capital will continue scrambling for
tangible assets. But evaporating platinum takes a lot of effort because its
melting point is 1,768.3 °C or
3,214.9 °F compared to
gold’s 1,947.52 °F,
silver’s 1,763.2 °F and
it is important to remember that paper ignites at 451°F.
Because of the rising demand for platinum from both public
and private parties, the shortage of alternatives for little colored coupons,
platinum’s excellent monetary attributes and the ability to easily
function as currency through innovations like GoldMoney therefore the future looks bright for the silvery-white metallic
element. The same principles for buying gold or silver safely apply when
considering how to buy platinum.
PLATINUM PRODUCTION
Platinum producers are extremely rare. There have
been chronic problems with open cast deep underground platinum mining in
South Africa. There is Angloplat [AMSJ.J] which produced 2.5M ounces in 2007,
Impala Platinum (IMPUY.PK) which produced 1.9M ounces for year ending 30 June
2008 and is up about 50% since I recommended platinum, Lonmin and Norilsk
Nickel [GMKN.MM]. Stillwater Mining Company (SWC) is the only one domestic United States platinum producer, are
majority owned by the Russian Norilsk and up about 137% from when I
recommended platinum in July.
With commodity producers there tends to be a
leveraged effect on earnings relative to the commodity price. Consequently, a
significant rise in platinum without hedging will tend to exponentially
affect their bottom line either positively or negatively.
CONCLUSION
Platinum has had a tremendous run over the past 6
months and I am pleased with the performance. Platinum is not nearly the
incredible value today as it was then and the 50dma and 200dma are not at
strategic entry points. Nevertheless, it is a prime substitute for little
colored coupons, goes into the cash portion of the balance sheet, is easily
purchased with low margins, is extremely rare relative to the other precious
metals, has bright demand prospects and still appears to be undervalued
relative to gold by about .4-.7 ounces of gold per ounce of platinum.
So I recommend doing what I have done since being
bitten by the platinum bug: accumulating fully paid for physical metal on a
consistent regular basis. While I have not exchanged my gold or silver for
platinum, largely because of tax considerations, I have shunted most of my
gold and silver demand into allocated physical platinum. After all, platinum,
like gold and silver, can never become worthless.
DISCLOSURE: Long
physical gold, silver and platinum with no interest the problematic SLV or GLD
ETFs, the platinum ETFs or in the Angloplat, Impala Platinum,
Lonmin and Norilsk Nickel or Stillwater Mining Company.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young University,
a law degree from California Western School of Law and studies the Austrian
school of economics. He works as an entrepreneur, investor, journalist and
monetary scientist. He is a strong advocate of the freedom of speech, a
member of the Society of Professional Journalists and the San Diego County
Bar Association. He has appeared on ABC, NBC, BNN, many radio shows and
presented at many investment conferences throughout the world.
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