Platinum and Palladium: Two Contrarian Bets in a Risky Market

In a world where central banks regularly enter the market to weaken their currency, it’s easy to forget that a currency can fall for old fashioned reasons like trade deficits, foreign liabilities and bad sentiment.

That goes some way to explaining why the South African rand is falling at the moment. But that’s only part of a wider story that resource investors should be watching. It’s the task of today’s Money Weekend to find out if all this might lead to a profit opportunity…

Aussie Mining Not the Only One Under Stress

South Africa is in the news for all the wrong reasons. You might be aware of the huge and tragically violent strikes that have hit the mining industry since August of this year. They began in the platinum industry.

One of the big miners in South Africa, Anglo American Platinum Limited (LON: AAL) fired 12,000 workers, then reinstated them! But none of them have returned to work yet.

The unrest has spread to the gold miners and, according to the Washington Post this week, now also to agriculture.

Natural resources like gold, diamonds and platinum are the main exports of the country. But the strikes have cut the output of the mines. Naturally, South Africa’s exports have dropped.

Bloomberg reported on Thursday, ‘South Africa’s mining production slumped the most in five months in September amid the worst labor unrest since apartheid.’

All this is bad news on the trade front, and it’s showing up in the currency. See for yourself…

The South African Rand Falling Against the US Dollar

Source: StockCharts



A falling currency and rising bond yields will put pressure on the South African government if foreign investors are spooked out in a big way.

Unfortunately, none of the problems in the country look like going away anytime soon, as political activism picks up to nationalise the mines. All this has added a hefty layer of political risk to a country that already had plenty of it.

The Forgotten Precious Metals

South Africa’s troubles have put two precious metals right in the spotlight for supply problems.

You might be thinking we mean gold and silver. After all, South Africa is the fifth largest gold producer on the planet.

But we’re actually talking about two other precious metals – platinum and palladium. The market can source its gold elsewhere if need be. The US and Australia are two options. But there’s not so much flexibility when it comes to platinum and palladium.

Take this report from BusinessWeek on Tuesday. ‘Platinum and palladium will return to the biggest shortages in at least a decade this year as strikes and safety stoppages in South Africa and falling sales from Russia cut supplies.’

South Africa accounts for about 80% of platinum supply and about 40% of palladium. That’s a big share of the market. As a pair, both commodities are heavily dominated by just two countries. The other is Russia.

And you could hardly call Russia one of the most stable countries on earth either.

You don’t hear as much about platinum and palladium as you do about gold and silver. They’re traditionally grouped with the four other metals ruthenium, rhodium, osmium and iridium to form the Platinum Group Metals.

Few people realise it, but platinum is actually more valuable than gold. According to the CRB Commodity Yearbook, ‘Platinum is one of the world’s rarest metals with new mine production totaling only about 5 million troy ounces a year. All the platinum mined to date would fit in the average sized living room.’

Platinum and palladium are hard to find in large volumes and difficult to mine.

Both of them have jewellery demand, industry demand and investment demand. But the stats are different for both. For example, 51% of platinum demand is from the jewellery industry, compared to only 4% for palladium. But the auto industry plays a big role for both, with 21% of demand for platinum and 63% of palladium. Both are used in catalytic converters.

And if our mate Dan Denning, editor of The Denning Report, is correct, the vehicle industry is one of the key factors for higher prices as emerging markets drive demand for cars and trucks.

If South African production doesn’t get back to normal, then odds are both platinum and palladium prices are going higher in 2013. Don’t forget the Fed’s money printing will no doubt continue to spark investment demand, too.

Contrarian Bets in a Risky Market

But the price action in the metals won’t benefit platinum and palladium stocks based in South Africa immediately.

The higher metals prices are probably bearish for the producers in the short-term because the price is being driven by the supply bottleneck. You can’t sell what you can’t mine.

On the other hand, the rising prices of the metals may attract investment flows to the PGM ETFs. And for investors, the bearish sentiment in the producers is exactly the invitation you need, with lower share prices, to consider taking a position.

But the supply deficit in the Platinum Group Metals is just one side of the equation. The other is demand. When you balance them, 2013 looks like a good bet for higher prices in the PGM group.

It’s a contrarian play because South Africa is probably scaring the bejesus out of most investors. But Dan Denning was on the ground in South Africa last month and his view is that sentiment in South Africa is ripe for a turnaround.

And therein lies the opportunity. As he wrote in his report for subscribers, ‘This point of maximum pessimism is also when you find investments at their cheapest.’

Dan tipped a stock to capitalise on this idea in last month’s The Denning Report.

If you don’t mind a speculative punt, with all the bad news happening in South Africa right now priced in, it’s a great time to bet on these overlooked precious metals.

Callum Newman
Co-Editor, Scoops Lane

The Most Important Story This Week

The Aussie stock market took a hit this week. On Wednesday it followed the US market down. The ASX tends to move in step with the US. That means one of the key indexes in America, the S&P 500, is a key signal to watch. Murray Dawes, Port Phillip Publishing’s in-house trader, analysed it this week. Forget about the fiscal cliff, you need to watch the ’200 day abyss’ to see where Aussie stock are heading. Murray says why in Avoid the Slaughter: Watch This Key Stock Market Pointer

Highlights in Money Morning This Week…

Kris Sayce on Retirees and the Fed Face Off: ‘After 40 years of expanding credit like nobody’s business, and four years of printing money and bailing out zombie banks like it was going out of fashion, the US Federal Reserve has worked out why it’s plan to boost the economy isn’t working.’

Murray Dawes on Avoid the Slaughter: Watch This Key Stock Market Pointer: ‘Markets did continue to fall from there, and now they are quite literally resting on the precipice of the 200 day moving average. Everyone is banging on about the ‘fiscal cliff’, but are they aware they are now staring at the ’200 day abyss’? I doubt it.’

Dr. Alex Cowie on Why Lithium is Another ‘Rare’ Element on China’s Radar: ‘What have iPhones, laptop computers, electric toothbrushes, and power-tools all got in common? They’re all powered by a ‘magical’ element that’s on the British Geological Survey’s Risk List of strategic minerals.’

William Patalon on Obama Wins: Why the Case For Higher Gold Prices Got Even Stronger: ‘The case for higher gold prices got even stronger. Let me give you seven reasons that gold prices are destined to head much higher in the next several years. Let’s call it the Obama ‘baker’s half-dozen’ case for gold.’

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