Spot platinum headed for a seventh consecutive session of gains on Wednesday, after buying interest was triggered last week when its value relative to gold dipped to a discount for the first time since the 2008 financial crisis.
The spread between spot platinum and gold prices hit a discount of $31 (U.S.) an ounce last week, its lowest in nearly 26 years, as economic concerns boosted the safe-haven appeal of gold but weighed on industrial metal platinum.
It quickly returned to a premium of $32, still well below an average of $205.80 since 1985, but the dark clouds over the global economy may still dim platinum’s longer-term outlook.
LOW SPREAD MEANS CHEAP INVESTMENT
Gold rallied nearly 21 per cent from the end of June to a record high of $1,813.79 an ounce on Aug. 11, as a debt crisis in Europe and a downgrade of the credit rating in the United States drove investors to bullion.
The drop in the platinum-gold spread offers a chance for investors seeking exposure to the safe-haven appeal of gold but uncomfortable with gold’s lofty prices.
“The issue had been when gold went outright above platinum, there were people asking is it time to buy platinum, is it looking undervalued?” said Societe Generale analyst David Wilson.
“I guess if enough people believe that, then it is. It doesn’t really matter what the fundamental realities are.”
Demand for platinum ETFs is outstripping buying of other precious metals-backed products in percentage terms this year. Platinum inflows are up 9.35 per cent, compared to 5.8 per cent in gold.
Stagnating supply growth and high production costs are adding to the mix of reasons to build up platinum positions, said Dominic Schnider, executive director of UBS Wealth Management research.
“If you look at production costs, these costs have geared towards $1,750 an ounce,” he said. “There’s no motivation to expand production if you don’t see margins expand.”
History is also against a return to discount. Even during the height of the 2008 financial crisis the spread was only in negative territory for a couple of days. You have to go back to 1991 to find a sustained period where platinum has been worth less than gold.
UNCERTAINTY: PLATINUM LOSES, GOLD WINS
The investment frenzy may push platinum higher in the short term, but the metal remains prone to economic downturns and heavily exposed to Europe’s car sector, which uses mostly diesel engines that require autocatalysts made mainly from platinum.
“The outlook for platinum in dollar terms is ... less bullish with platinum recording lower highs and lower lows over the last few months to establish a fairly clear downtrend,” said David Jollie, analyst at Mitsui Precious Metals.
“This more accurately reflects the change in market consensus from one of positivity about global growth to concerns over possible double dip recessions in Europe and North America.”
So long as investors feel nervous about the global economic growth, gold’s appeal will continue. With U.S. interest rates set to stay low through 2012 and the euro zone debt crisis spreading, there is no lack of encouragement for gold bugs.