What accounts for the lack of interest in platinum in South Africa? In this blog, I will address this question, and provide a brief thought on the future of platinum as an investment alternative. Please note that I will not address why platinum is a good investment. Rather, the focus is why it seems to be an out of favour investment product here in South Africa.
Money was never platinum
Silver and gold have a history of utility as money. From the earliest of human civilisation, silver and gold were used as money. In fact, up until the middle of the 1960s, circulation coins contained 90% silver i.e. R1, 50c, 20c, and 10c South African coins. In other words, silver was (is) money. The same applies to gold, although the last gold circulation coins were removed from circulation in the early 1900s.
Platinum, on the other hand, has very little history as money. It has been seen primarily as a metal with industrial application (used primarily for catalytic converters in cars), with some application in jewellery, and even less for bullion investing. Psychologically, therefore, it seems to me that the precious metals investment community does not see platinum as money, or a store of value like its cousin, gold and silver. This may account for one of the reasons platinum bullion products lag far behind silver and gold.
Utility in Times of Economic Crisis
Historically speaking, safe haven assets like silver and gold have a rich history of utility during times of socio-economic crises. By crisis, I do not mean political uncertainty, but rather, a full-blown economic collapse like we are seeing in Venezuela for instance. Because of the usefulness of silver and gold as money for thousands of years, the average person naturally reverts to these two motels as a means of exchange, or, release ounces of encapsulated economic energy which help preserve the purchasing power. When hyperinflation strikes a country, the most proven precious metal (i.e. silver and gold) will be trusted and traded with the most. Coincidently, this includes central banks, who often build a substantial portfolio of gold because it is a safe haven asset that trades like a currency.
While I am sure that platinum will play a role, it will be much less significant that the roles of silver and gold. By extension, platinum will be ‘less’ trusted and utilised as a measure of value and as money.
Platinum Looks Like Silver; Just More Expensive
Although this may seem to be a little silly, investors are psychological beings who make decisions based on their experience, intuition, and instinct. From this perspective, platinum is often perceived as an expensive form of silver. The psychological connection between a precious metal and its use as money is important. It is almost natural to make this connection with silver and gold (especially for those who were alive when silver was still in circulation in coins), but I think it may be less natural to do so with silver, especially when it looks like silver.
Lack of Market Maturity in South Africa
Platinum is somewhat of an unpopular precious metal from the perspective of the South African investors. This is strange, given that South Africa produces a significant portion of all the platinum mined globally. At this time, perhaps 1% of my yearly bullion sales accounts for platinum sales. While I am not the only measure for the strength or condition of the South African platinum market (from the perspective of bullion investors), our numbers certainly indicative of investor apprehensiveness. I suspect other dealers have a similar platinum sales ration. In any case, when rough times arrive, it will be relatively easy to sell small amount of platinum in exchange for currency. However, any significant amounts will be more burdensome to offload due to lack of investor interest and mainstream market maturity. This is especially during times where the default setting for money is silver and gold.
Decreasing Use in the Automotive industry
A few decades ago, platinum was used in almost all the catalytic converters. This may have been one of the reasons contributing to the escalating prices. In response, manufacturers then looked for cheaper alternatives, and found that palladium was a suitable substitute. This then started to drive platinum prices down, and palladium prices up (a typical demand and supply dynamic). More seriously, almost 50% of the mined platinum yearly goes to catalytic converters. Given that diesel engines are slowly becoming unfashionable, and electric cars are all the rage, the picture is not rosy.
So, Yay or Nay?
Above, I have painted a rather bleak picture. One may be tempted to conclude that indeed, staying away from platinum is wise. However, I cannot help but suspect that there are two possibilities for platinum going forward.
The first possibility is that the industrial use of platinum will continue to decrease in the face of the world moving away from internal combustion engines to electric vehicles. In this scenario, platinum will be an expensive metal with little industrial value (as opposed to silver, at a fraction of the price), used primarily for jewellery and dentistry. Platinum mining will decrease due to decreasing demand, and so will the price. Again, supply and demand dynamics is at play. I think this scenario is less likely.
The second scenario may be the opposite of the one I described above. 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 discovery, and so this possibility may indeed act as a catalyst for demand especially for investors. Prices then rise. Moreover, palladium has increased in price exponentially in the past few years. Given that palladium is a by-product of platinum mining, and palladium is more expensive than platinum, it seems platinum is poised for an increase.
In this same scenario, it is possible that manufacturers (for a short time) will revert to platinum in their catalytic converters, since palladium, which was priced lower than platinum, is now double the price of platinum. This may rocket the price upwards.
Lastly, consider the South African context. Our country mines over two-thirds of the world’s platinum on a yearly basis. Think of the political nature and unionisation of mining in this country. If prices fall, mines have little choice but to close part of their operation until prices rise again. This may mean loss of jobs. Political interference, protest, and strikes will become an almost certainty. Such political interference never ends well, and can affect markets either positively, or negatively. You decide.