Gold could lose its shine
Ric Spooner from CMC suggests that platinum may recover ground against gold in 2013.
2013 should see platinum recover ground after falling to a 16 year low against its golden counterpart according to CMC Markets’ Chief Market Analyst, Ric Spooner’s annual outlook on the commodities market.
According to Mr Spooner, the combined news of a reduction in annual production of platinum, and a forecast of the greater demand for platinum at this stage in the industrial cycle could see prices surge in 2013.
In mid-January Anglo American Platinum announced that it will cut annual production by 400,000 tonnes, an amount that equates to 7% of the world’s production, creating a substantial supply deficit. With an upturn expected in the industrial cycle, and therefore greater requirements for platinum, Mr Spooner believes that platinum will surge, particularly against its gold counterpart.
Mr Spooner also highlights the potential for industrial disputes such as that which occurred in South Africa as a potential threat for production which could also drive prices higher. “Ageing mines in South Africa which are subject to considerable political risk are a major supply source for platinum. This came into play in recent months when strikes disrupted mine production,” said Mr Spooner.
Production levels
As a scarce metal, current mining production has a much greater impact on the demand supply balance for platinum than it does for gold according to Mr Spooner. Annual mine production is only a small proportion of total stocks in the gold market.
The industrial cycle
Demand for platinum centres much more on industrial uses and much less on investment than in the gold markets, with its main industrial uses being auto exhaust systems, electronic switching and glass manufacture.
Figures from the World Gold Council and Johnson Matthey show that the proportion of platinum used for industrial purposes is six times greater than gold. This, according to Mr Spooner, means that platinum is more sensitive to the industrial cycle than gold, falling more heavily when industrial production declines as it did in 2008 and 2011 but rising more when the economy recovers.
Monetary policy
Financial commentary often assumes that the end of quantitative easing and higher interest rates will be bearish for commodities.
Spooner expands, “While there is typically a short term negative reaction to the Fed withdrawing stimulus, the fact is that monetary tightening cycles are very often associated with bullish cycles in commodity markets. This is because the Fed begins to tighten when economies start to improve.
In the earlier stages of tightening cycles, improving industrial demand outweighs the negative impact of lower commodity investment demand and possible strengthening in the US Dollar. Indeed during the last two Fed tightening cycles in 1999/2000 and 2004/2006 we saw broad increases in the S&P GSCI Commodity Index.”
Trading prices
Today an ounce of platinum buys approximately an ounce of gold according to Mr Spooner, only slightly higher than the low of .86 in August. The recent mine strikes and more optimistic economic outlook have seen the ratio climb off this low but not enough to break through lower resistance levels, according to Mr Spooner.
He added “It may only take the markets to become a bit more optimistic about industrial production and motor vehicle sales for platinum to recover ground against the gold price. I expect that confirmation of reduced mining production could fuel this recovery.”
Implications for traders
Mr Spooner suggests that it could be a long while before markets return to a situation where an ounce of platinum buys 2.36 ounces of gold as it did in May 2008, however it expects traders to increasingly look to a ‘buy platinum; sell gold’ trade, known as a pairs trade. In such trades the trader does not have an exposure to the overall precious market but will profit if platinum outperforms either by rising more than gold in a bull market or by falling less in a bear market.
