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Resurgent auto industry points to gains in platinum

A worker casts an ingot of platinum at the Krastsvetmet nonferrous metals plant in the Siberian city of Krasnoyarsk, November 19, 2008.

ILYA NAYMUSHIN/REUTERS

Platinum has just entered into its annual period of seasonal strength - and the outlook in 2013 is encouraging.

The precious metal has a period of seasonal strength from Jan. 1 to May 31. The trade has been profitable in 21 of the past 26 periods. Average return per period was 8.9 per cent.

Seasonality in platinum primarily is influenced by demand from auto and jewellery industries. The auto industry consumes about 46 per cent of annual production and jewellery takes another 31 per cent. Platinum also is used in electronic products, anti-cancer drugs, turbine engines and fuel cells. Incremental demand during the period of seasonal strength mainly comes from the auto industry. Platinum is an important component in catalytic converters that control exhaust emissions. The traditional auto buying season is from February to May.

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Demand for platinum used in the auto industry continues to grow. A recent article in the Economist predicted that world car production will increase to 82.8 million units in 2013. The Economist noted that global assembly lines are being built at a rapid clip to meet the demand. China remains the largest auto producer in the world. The biggest per cent increase in 2013 auto sales is expected to come from the United States, with India, Russia and China following closely behind.

New and rapidly growing demand for platinum is coming from Japan after the country faced energy production constraints following the tsunami. Platinum is used as a catalyst in fuel cells. Panasonic finally has developed fuel cell technology ready for broad commercial use in homes as well as cars. The company claims that its units are capable of reducing residential energy consumption by 65 per cent. A government official recently predicted that the number of residential fuel cells in Japan, currently at 10,000 units, will increase to 5.3 million units by 2020 and to 5.3 million units in 2030.

A declining supply of platinum also is a factor. Platinum refiner Johnson Matthey noted in a November 2012 report that disruptions in 2012 production from South Africa, the world's largest supplier of platinum, will result in a 10 per cent drop in worldwide platinum supply to 5.84 million ounces. Gross demand in 2012 was predicted to remain firm at 8.07 million ounces. Including recycled material, demand was expected to exceed supply by 400,000 ounces. Platinum production from South Africa is forecast at 4.25 million ounces, an 11-year low. Production declines in 2012 were triggered by ongoing labour disputes, closure of smaller marginal mines and the mining of declining grades.

On the charts, platinum has a mixed, but improving technical profile. Platinum at $1,540 recently stabilized near its 200-day moving average near $1,540 per ounce. Short-term momentum indicators are oversold and showing early signs of bottoming. However, Platinum remains below its 20- and 50-day moving averages. A move above its 20-day moving average currently at $1,595 will trigger technical and seasonal buying.

Investors can participate in prospects for platinum by owning exchange traded funds. Top choice is ETFS Physical Platinum Shares. Units trade at approximately 1/10th the price of platinum and are backed by physical metal. An alternate choice, that also is backed by physical metal, is ETFS White Metals Basket Trust. The trust holds a basket of precious metals weighted 55 per cent silver, 33 per cent platinum and 12 per cent palladium. Another alternative is iPath DJ-UBS Platinum units. Units are backed by platinum futures contracts.

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About the Author

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Inc. Reports are available at www.timingthemarket.ca and www.equityclock.com. Follow him on Twitter @EquityClock. More

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