Going Platinum

You know things have gotten somewhat out of whack when the price of gold is discussed in the OP-ED section of the New York Times. The mainstream recognition of the outperformance of this monetary paperweight gave us no small degree of amusement. What is even more surprising is the outperformance of silver, which makes perfect sense as the ETF has shown up on the most wanted list on Robin Hood. The fact that the barstool sports crowd has shown interest in silver shows that price is king, fundamentals ( or particular asset) be damned. As you know, we have been strong proponents of hard assets of late (last 10 years), and precious metals in particular, however we take issue with those that choose to omit platinum as a precious metal worthy of attention. While ETF holdings of platinum have significantly increased, the fundamental picture continues to improve, despite almost an overwhelming amount of street “research” that would argue otherwise. The fact that price has trended sideways for the last five years has proven fertile ground for those that might argue for a perennially moribund price in the future, but there are some shifts that are occurring at the margin that could lead to sharp price increases in the future. 1)Substitution of Palladium into Platinum: The price of Platinum is trading at a $1400/oz discount to Platinum, more than 3 standard deviations away from its normal trading relationship. While analysts argue that this substitution cannot be made, this is already underway on a small scale, even a slight shift would equal to enough additional demand to erase the current annual surplus. 2) Severe under-investment in sustaining production. Losses on platinum production have been subsidized by governmental edict up until 2016 and then by the rising cost of palladium and rhodium for the past several years. While often part of a basket of production, the stand alone price of Platinum is barely at break even in South Africa. Combine this fall in primary production with a drop in recycled material and the supply picture looks challenged to say the least. 3) Hydrogen Fuel Cells have received a great deal of press lately, with the hype surrounding companies like Nikola and others. What the market fails to take into account is the amount of additional Platinum that will be required to sustain the hydrogen fuel cell infrastructure, which is still in its infancy but already highly promoted by both Japan and China as the transportation fuel of the future.

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