At a time when diminishing faith in gold is spurring investors to sell record amounts of the metal, demand for platinum and palladium is strengthening as mining companies curb supply.
Gold owned through exchange-traded products fell 17 percent this year as platinum holdings rose 31 percent and those in palladium 17 percent, data compiled by Bloomberg show. Platinum will end the year at $1,690 an ounce, or 16 percent more than now, while palladium will gain 7.5 percent to $800 an ounce, according to the medians of 15 analyst estimates compiled by Bloomberg. The majority of 38 analysts surveyed last month said gold would post an annual drop, ending a 12-year winning streak.
The divergence underscores the waning trust in gold as a store of value after prices tumbled into a bear market in April. Strengthening investor demand for platinum-group metals, used in catalytic converters, reflects a second year of shortages that are outweighing concerns about slowing economic growth. Global car sales will expand to a record this year and next, according to LMC Automotive Ltd., a research company in Oxford, England.
“Anybody who wants to participate in precious metals, that’s getting whipsawed like on gold, is looking at much smaller precious-metals markets as being attractive,” said Jeffrey Sica, who helps oversee more than $1 billion of assets as president of SICA Wealth in Morristown, New Jersey. “If you look at platinum and palladium, even with an economic slowdown, they’re able to maintain healthy levels of demand.”
Platinum fell 5.2 percent to $1,460.50 in London this year as palladium rose 6.2 percent to $747.60. Gold retreated 18 percent to $1,376.65 an ounce and silver plunged 26 percent to $22.4602 an ounce. The Standard & Poor’s GSCI gauge of 24 commodities declined 2.5 percent since the start of January and the MSCI All-Country World Index of equities rose 12 percent. A Bank of America Corp. index shows Treasuries lost 0.4 percent.
Industrial applications account for about 10 percent of gold consumption, compared with 60 percent for platinum and 91 percent for palladium, data from the World Gold Council and Johnson Matthey Plc show. Palladium demand advanced 16 percent to a record 9.9 million ounces last year and while platinum usage dropped 0.6 percent to 8.05 million ounces, it was still the third-highest level ever, according to Johnson Matthey, which has made one in three of the world’s autocatalysts.
Demand for both metals is exceeding supply for a second consecutive year and will do so again in 2014, Barclays Plc estimates. The shortages emerged as strikes disrupted mining and stockpiles dwindled, resulting in a 10 percent drop in platinum output and 11 percent retreat in palladium production last year, according to Morgan Stanley.
While the mining slump boosted prices, it also hurt producers, with Anglo American Platinum Ltd., the biggest, reporting a record loss of 6.7 billion rand ($705 million) in 2012. Shares of the Johannesburg-based company fell as much as 39 percent to an almost eight-year low of 273.18 rand this year.
The strength of economies is the greatest threat to the projected gains in prices because central banks are still printing money on an unprecedented scale to bolster growth. Bank of America says policy makers cut interest rates more than 500 times since June 2007 and the International Monetary Fund lowered its 2013 global outlook four times since July.
Platinum tumbled 39 percent in 2008, the most in at least two decades, and palladium declined 49 percent as the global economy endured its worst recession since World War II. Platinum demand still hasn’t rebounded to its level in 2007 and for palladium it took three years to recover.
“They’re both a precious metal and an industrial metal,” said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “Gold and silver, which are also precious metals, are breaking down, which is a headwind, but if we get continued slowing of global growth it’s going to be the key driver in the price.”
Hedge funds and other large speculators are getting less bullish. They cut bets on higher platinum prices by 44 percent since mid-February and those in palladium by 27 percent in the past six weeks, U.S. Commodity Futures Trading Commission data show. The net-long position in both metals is still above the average of the past three years at a time when money managers hold a record 74,432 so-called short contracts for gold futures.
Platinum and palladium mining is concentrated in two nations, increasing the potential scale of disruptions during labor protests. South Africa and Russia account for 86 percent of platinum output and 80 percent of palladium supply, Barclays estimates. Strikes cost South African mining companies as much as 15 billion rand in revenue last year, according to the National Treasury.
Anglo American Platinum said May 10 it would idle three shafts and cut 6,000 jobs to help restore profit. Platinum production capacity will be reduced by as much as 350,000 ounces. That implies a drop of 165,000 to 170,000 ounces in palladium and 40,000 to 45,000 ounces of rhodium, both of which are found in the same ores, the company said in an e-mail. Rhodium is also used in catalytic converters.
Rising labor and energy costs may mean more mines closing and companies’ efforts to preserve capital means significant gains in supply are unlikely, Commerzbank AG said in a May 7 report. The industry is in a “very tough place,” Lonmin Plc Acting Chief Executive Officer Simon Scott said in an interview with Bloomberg Television May 13. The company is the third-largest platinum producer and its Marikana mine in South Africa shut the following day because of a strike.
Palladium supply is also being constrained by declining state stockpiles in Russia, with Johnson Matthey projecting sales of about 100,000 ounces in 2013, the last year of “substantial shipments.” The reserves, which are a state secret, provided 1 million ounces to consumers as recently as 2010, according to data compiled by Johnson Matthey.
European Union car sales rose in April for the first time in 19 months, the Brussels-based European Automobile Manufacturers’ Association said May 17. Global sales will rise 3.4 percent to 83.8 million units this year and climb another 6 percent in 2014, according to LMC Automotive. Autocatalysts are canisters with honeycomb-like surfaces that convert car emissions into less harmful substances.
Holdings of platinum in ETPs tracked by Bloomberg advanced to 61.2 metric tons valued at $2.9 billion this year, as of May 20, as the amount of palladium increased to 67.2 tons valued at $1.6 billion. Gold investment through the products dropped to 2,187.4 tons valued at $97.2 billion. The metal will close the year at $1,550, 7.5 percent less than at the end of 2012, according to the median of Bloomberg’s survey last month.
“There is a legitimate argument to say that PGMs offer some value relative to gold,” said Charles Morris, who oversees about $2.5 billion at HSBC Global Asset Management in London. “If you do want to be in precious metals then this is the best risk-reward you can get.”