Rallying platinum prices are on the brink of hitting parity with gold, as concerns over supply outages in South Africa reignite, and stabilizing economic conditions in China and the U.S. boost the appeal of industrial metals over safe havens.
Even though platinum is still vulnerable to hiccups in the tentative global economic recovery, the white metal's discount to bullion has shrunk to its tightest in nine months, a signal commonly associated with cyclical upswings.
"The best indicator for the platinum-gold ratio is global industrial production," Bank of America Merrill Lynch analyst Michael Widmer said. "If you get a stabilization of growth in the advanced nations, which may pick up later this year, you would expect platinum demand to be stronger."
"If you expect a cyclical upturn in demand, a metal with more industrial properties like platinum would normally outperform gold."
Gold prices rallied decisively above those of platinum in 2011 after successive rounds of monetary easing pressured long-term interest rates, fuelled inflation fears and drove investors into the safety of hard assets. They have since struggled for further gains as the wider markets stabilizes.
"There're a lot of things going against the gold price: nominal yields have risen, the Fed is reviewing the risks of implementing QE," Widmer said. "In terms of trading gold versus platinum, I would definitely favour platinum this year."
The spread between gold and platinum narrowed to around $12 (U.S.) an ounce on Monday, its smallest since April, after platinum staged its biggest two-week rise in four months ahead of a review of number one miner Anglo American Platinum's mining operations in South Africa, and on growing expectations for an economic recovery.
On average, platinum has stood at a $190 an ounce premium over gold since 1985.
As more than half of platinum is used in industrial applications, sluggish global economy had dulled the metal's shine, despite its scarcity and a market deficit caused by supply constraints in top producer South Africa.
That picture may shift this year to platinum's favour, as hopes grow that Europe may stabilize and the global economy embarks on a steady path to recovery, lifting the outlook for metals used in industry.
"You have a metal which is more expensive to produce than gold, whose supply is not growing and whose market is expected to be in a deficit," said Dominic Schnider, an analyst at UBS Wealth Management in Singapore. "Such metal should trade at a premium to gold."
But he cautioned that a return to a big premium in platinum would be unrealistic.
"We are going to make it to the parity and a possible $50 premium in platinum. But the global economy is still on a weak footing and it will be too early to call a $100 premium."
The average production cost of platinum was about $1,600 an ounce, while the production cost of gold stood at $1,200 an ounce, he added.
Spot gold traded at $1,668.24 an ounce earlier Monday, down about 0.4 per cent so far this year after posting gains for the twelfth year in 2012.
Spot platinum traded at $1,635, up more than 6 per cent so far this year and leading the performance of the precious metals complex.
About two-thirds of Europe's platinum demand in 2011 went to the auto sector. Car sales in the region are expected to further decline in 2013, as the euro zone debt crisis and government austerity measures sap consumer demand.
The high net longs in U.S. platinum futures and options may pose a threat to a sustained platinum rally, as speculators loaded with long positions may sell off to take profit in the short run, analysts and traders said.
Net longs in U.S. platinum futures and options bounced from a one-month low to 28,939 lots in the week ended Jan 8, down 18 per cent from an October peak of 35,145 lots, but up 59 per cent from the 2012 average.