Platinum wasn’t historically used as money
From the earliest human civilization, silver and gold were used as money. In fact up to the middle of the 1960’s the South African R1, 50c, 20c and 10c circulation coins contained 90% silver. In other words, silver was (and still is) money. The same applies to gold, although the last gold coins were removed from circulation in the early 1900s. Platinum has very little history as money. When it was initially discovered in 700 BCE in Egypt, it was utilized for decorative purposes. In modern times, it has been seen primarily as metal with industrial uses, with some application in jewellery, but even less for bullion investing. It seems that the precious metal investment community does not see platinum as money or as a store of value like its cousins gold and silver. This may be one reason why platinum bullion products lag far behind silver and gold. Although this may seem a little illogical, investors make decisions based on experience, intuition and instinct. From an investor’s perspective, platinum is often seen as an expensive form of silver. The psychological connection between precious metals and their use as money is therefore important. It is almost natural to make the association with silver and gold (especially if you were alive when silver was still in circulation in coins), but I think it may be less so with platinum.
Decreasing use in the automotive industry
A few decades ago, platinum was used in almost all catalytic converters. This may have been one of the main contributors to escalating prices. In response, manufacturing began to look for cheaper alternatives and found palladium to be a suitable substitute. This started to drive platinum down and palladium prices up (a typical demand-and-supply dynamic). More seriously, almost 50% of the platinum mined yearly goes to catalytic converters. As diesel engine is slowly becoming unfashionable and electric cars have become all the rage, the picture for platinum is not rosy.
Why the platinum price should increase
I have painted a rather bleak picture for platinum in these pages. You may be tempted to conclude that, indeed, staying away from platinum is wise. However, I propose that there are two future possibilities for platinum. The first is that the industrial use of platinum will continue to decrease as the world moves away from internal combustion engines to electric vehicles. In this scenario, platinum will remain an expensive metal with little industrial value (as opposed to silver, which is available at a fraction of the price), used primarily for jewellery and dentistry. Platinum mining will decrease as a result of decreasing demand, and so will its price. Again, supply–and–demand dynamics are at play.
However, I believe this scenario is not very likely. The second scenario is the opposite of the one I just described. Perhaps the lack of demand may lead to a serious dip in production and platinum may become scarce(er). Scarcity is generally an important dimension of price recovery, and so this possibility may indeed act as a catalyst for demand, especially from investors. Prices will then rise. Moreover, palladium has increased in price exponentially in the past few years. Because palladium is a by-product of platinum mining, and palladium is more expensive than platinum, platinum seems to be poised for an increase.
In this same scenario, it is possible that, in the short term, manufacturers will revert to platinum in their catalytic converters, since palladium, which was priced below platinum, is now double the price of platinum. This may rocket the price upwards.
Article courtesy of Going for Gold: A guide for the South African precious metal investor by Zoltan Erdey
