We continue looking deeper at platinum and palladium in this follow up article on why buy platinum and palladium – part 2.
The worldwide demand for platinum jewelry rose in 2012, as a result of increased demand from India and China – predominantly a consequence of lower prices. Jewelry plays an important role for platinum as it stands for 30% of total demand.
Investment demand for platinum is also increasing. Although it only makes up 6% of total demand the number is growing – last year by 6.5%.
Lower platinum prices are now creating problems for miners – similar to the situation for many gold mining companies. Most platinum miners have a production cost that is above the current price of platinum. This is a serious problem for supply – one which will force prices higher eventually.
So the case for declining platinum supply is strong, whereas the demand side will continue to be stable or even grow going forward. These are both convincing reasons for rising platinum prices going forward.
When it comes to palladium the case is much the same as with platinum. In 2012 the production deficit was at its highest since 2001, totaling 915,000 ounces.
More specifically, the current demand and supply factors for palladium are:
Supply is dwindling. Russia is the second largest palladium producer in the world and their stockpile is close to depleted. Disruption factors such as strikes and power outages in the world’s largest producer of palladium, South Africa, is also causing supply issues. Recycling levels are furthermore falling.
The demand side for palladium is strong, especially that coming from the auto industry – where autocatalytic converters saw an increase by 7% in 2012. Palladium can actually be substituted for platinum when it comes to emission control systems for gas powered motors. These are favored in India and China. In China there has furthermore quite recently been a mandate for catalytic systems for all cars in the country, which should ensure continuous demand.
The investment demand for palladium is also growing. There is still not a wide spread use of palladium in jewelry but this could change quickly.
As is evident in the list of reasons above, platinum and palladium both have similar drivers. The supply disruptions have led to deficits in both metals. These deficits won’t be corrected overnight, as the metals can’t be produced at will. The current imbalances coupled with low interest rates and central bank stimulus point to higher platinum and palladium prices going forward.
This is the base case scenario. Should supply become extremely constrained due to major problems with production in South Africa, which very well could happen, prices could skyrocket.
If there are further corrections in gold and silver it would be a good opportunity to buy platinum and palladium as a supplement to your gold and silver bullion holdings. In any case though, both platinum and palladium offers some attractive potential today.
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