Why is Platinum Underperforming?

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I make no fun of technical traders, but looking only at a good or bad chart is simply not enough for me. When I see things that make no sense to me on a quote screen — I have to know why. I asked the same source about platinum that I asked about the strange action in copper:

“So why is platinum down for the year and palladium is up?” I asked.

“‘Cause they are buying palladium instead,” was the answer.

“Ok, but why?” I kept nagging.

“Well, it’s easier to move,” he replied.

That’s it? And sure enough, that was it apparently — it was easier to move. Sometimes, I wonder about some of the people that run institutional money. There are as many charlatans running institutional money as there are in any business, but buying palladium over platinum simply because it’s “easier to move” is not a good enough reason, in my view.

For what it is worth, platinum is about to flip negative for the year, palladium is up 18%, while gold and silver are holding up — having risen about 11.8% and 6.7%, respectively. Curiously, silver is underperforming gold, which in my opinion is a sign of profit-taking in precious metals, as silver is “easier to move” too.

Only about 20% of platinum is used for precious purposes — while about half of global production is used for catalytic converters. Since diesel engines rose to heightened popularity due to the oil spike in 2008 and because they are more efficient than gasoline engines, platinum went parabolic that year as catalytic converters for diesel engines use primarily platinum.

Since then, we have had a large correction and an equally impressive recovery. Palladium has mostly been dragged around by platinum in the past 10 years and the current action is a little strange.

Political Issues at the Source?

South Africa is by far the richest source for both metals, and things are not very smooth there. There are rule changes in mining rights that affected both Anglo American (OTC: AAUKY) and Lonmin (OTC: LNMIY), which lost a few projects. This is disturbing considering that this type of political action has generally been looked down upon in the past 16 years since the African National Congress took over.

As the recent Australian example showed, increasing taxes or meddling with mining rights discourages exploration and forces multinationals to focus on friendlier jurisdictions. With high unemployment and the need for investment in mining, the last thing the country needs is Zimbabwe-style politics. The issue with South African mines is that they are some of the deepest and most expensive to operate, so discouraging new investment is bad politics. If this continues, it would be bullish for platinum and palladium long term because it would lead to decreased production.

For the time being, I would view the weakening of economic data in the West as a sign to be cautious with most industrial metals. Platinum is investable through the ETFS Physical Platinum (NYSE: PPLT) and palladium through the ETFS Physical Palladium (NYSE: PALL). This is probably the time to make shopping list in the sector, as better opportunities will emerge in the next couple of months.

Anglo American controls the biggest platinum miner, which is separately traded as Anglo Platinum (OTC: AGPPY) and is capitalized at $23 billion. The second-biggest producer is Impala Platinum (OTC: IMPUY), capitalized at $15 billion. I can make an excellent case to buy both stocks if you plan to hold for the next five years, but I’d rather first see how the mining rights issue plays out. I don’t think that anything will come out of it — it’s probably more bark than bite — but there is some risk.

If one is looking to buy a company that is a play on all precious metals, Anglo American is it. It is about half the size of Rio Tinto (NYSE: RTP), but the mining mix is much more concentrated. In addition to its huge stake in platinum and diamonds — it owns 45% of De Beers — the company covers copper, iron ore, metallurgical coal, nickel and thermal coal.

The company is solidly profitable with operating margins at 32% and return on equity of about 15%. It has a long history as a successful operator in challenging jurisdictions, so if you want to take on some slight risk with serious upside, Anglo American fits the bill to a T.

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Article printed from InvestorPlace Media, https://investorplace.com/2010/08/platinum-underperforming/.

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