A one troy ounce platinum bar struck by the respected Swiss precious metal refiner Valcambi SA. This unique, gray-white metal is currently more undervalued than gold, silver or palladium and represents an intriguing investment possibility for the unconventionally minded.
Platinum is the world’s most undervalued monetary metal at the moment – a contrarian investor’s dream come true. Read on to discover what makes this overlooked precious metal so special.
Platinum’s Physical Properties
Platinum has a unique, grayish-white metallic color. It isn’t as bold as silver, but instead exudes a sophisticated, yet understated, sensibility. Many people find it mesmerizing, particularly when skillfully employed in jewelry.
With a density of 21.45 g/cm3, platinum has one of the highest specific gravities of any element on the periodic table. This means that a cube of the stuff weighs more than 21 times as much as an identically-sized cube of water. Platinum even bests the density of gold (19.3 g/cm3), which is extraordinary given the yellow metal’s freakishly high specific gravity. And the gray-white metal is over twice the density of silver (10.49 g/cm3).
Platinum also possesses all the desirable attributes common to the other precious metals, such as ductility, malleability, reflectivity and non-toxicity. In addition, platinum is a very strong and tough metal, making it perfect for demanding industrial applications or jewelry, where it exhibits very little wear loss over time.
Platinum is also notable for its extremely high melting point, only succumbing at 1768 °C, or 3214 °F. For reference, a typical house fire reaches about 590 °C (1100 °F), while a Bunsen burner maxes out at around 1,400 °C (2550 °F). Platinum requires highly specialized equipment to melt, which is why the technology to successfully refine its ores weren’t developed until the 18th century.
In addition, this incredibly versatile metal has striking catalytic properties. A catalyst is any substance that speeds up a chemical reaction without being consumed by it. In this case, platinum – along with its sister element palladium – has an intriguing affinity for hydrogen at the molecular level. This makes it quite useful in a myriad of industrial applications.
The gray-white metal is also exceedingly corrosion resistant. Platinum is impervious to most corrosive household chemicals, including bleach, chlorinated water and table salt. In contrast, common metals such as copper, brass, aluminum and steel are readily attacked by these compounds. Even silver won’t survive them for long.
About the only chemicals that will attack platinum are hot aqua regia (a combination of two extremely strong acids – nitric and hydrochloric – which is notorious for being able to dissolve gold), certain highly corrosive halogen gases (i.e. elemental fluorine, chlorine and bromine) and molten caustic soda (sodium hydroxide – a very strong alkali).
Suffice it to say that if you find your platinum is corroding, there is a very good chance that everything around it has already been dissolved, burned or otherwise destroyed.
Platinum’s Uses
All of these wonderful physical properties make platinum a very desirable material with a wide range of real world applications.
For example, its number one use is in vehicle catalytic converters. When finely dispersed in a car’s catalytic converter, the metal helps to fully oxidize poisonous carbon monoxide gas and any unburned hydrocarbons, while simultaneously decomposing noxious nitrogen oxide compounds. These undesirable gases then leave the car’s exhaust as harmless carbon dioxide, water and nitrogen.
Platinum is also highly prized in jewelry making. The lustrous, gray-white metal has a subtle presence that can’t be achieved with traditional gold or silver. In addition, its phenomenal strength and long-wearing qualities make it, in some respects, the perfect jewelry metal.
Another bonus of platinum jewelry alloys is that they are much purer than your typical gold alloy. For example, most platinum jewelry alloys are either 90% or 95% fine. The metal’s unique physical properties allow it to retain its hardness and strength in this near-pure form. This compares quite favorably with gold, which must be heavily alloyed to improve its strength and wear characteristics. Most gold jewelry ranges in purity from a paltry 37.5% fine (9 karat gold) to a much-improved, but still inferior 75% fine (18 karat gold).
Platinum has a variety of important industrial uses as well. It is used to coat the platters in computer mechanical hard drives. It is also vital in glass-making, where it is employed in high-temperature crucibles that hold molten glass. The resulting high quality glass is typically used in expensive end products like watches, laptops and cell phones.
The metal’s properties as a catalyst are invaluable to the chemicals industry. It has been vital to the bulk synthesis of nitric acid for well over a century. Oil refineries deploy platinum coated catalysts to help crack crude oil into usable gasoline distillates. As long as we need gasoline for our cars or nitrogen-rich fertilizer for our fields, we will need platinum to help us make it.
The precious gray-white metal has a myriad of other more minor industrial applications as well. These include biomedical uses (it is used extensively in cancer treatments) and fuel cells (it efficiently catalyzes oxygen and hydrogen into water, releasing electricity as a by-product).
Platinum is also commonly fabricated into laboratory crucibles because of its corrosion resistance and ultra-high melting point.
The History of Platinum
Although platinum was known to some Pre-Columbian cultures of South America, the Spaniards who colonized those lands in the 16th century thought little of the strange, white metal. It wasn’t until the mid 18th century that platinum was finally recognized as being a chemically distinct element. However, the fact that the native metal almost always occurred as an alloy with other platinum group elements confounded scientists for many decades.
In 1783, the French chemist Francois Chabaneaus pioneered a method for working with the new wonder metal. Funded by the Spanish King Charles III, Chabaneaus’ technological breakthroughs were a state secret. As a result, the world’s first commercial platinum foundry was established in Spain, ushering in the Iberian country’s so-called “platinum age”.
During the period from 1786 to 1808, it is estimated that Spain produced as much as 18,000 troy ounces of wrought platinum accessories, plate and silverware, including an extravagant 55 ounce chalice for Pope Pius VI.
The 18th century French king Louis XV, tired of being surrounded by palaces dripping with gold and silver, purportedly remarked that platinum was the only metal fit for a king.
In 1889, the International Bureau of Weights and Measures (IBPM) in France defined the official kilogram standard as a perfectly formed cylinder of 90% platinum and 10% iridium. Platinum was chosen to fabricate the kilogram prototype because it is a nearly immutable substance that does not corrode, oxidize or otherwise change with the passage of time. Today, 6 copies of this immensely important prototype weight reside in the IBPM in Sèvres, France, all of them composed of the same platinum-iridium alloy.
Although it is idle speculation, I strongly suspect that if the modern Olympic Games had been resurrected a couple decades later than its original 1896 debut, the first place winner would be awarded a platinum medal today instead of a gold medal. But the precious white metal had not yet penetrated popular culture in the 1890s.
The 1920s, however, ushered in a new era for platinum as the must-have “white look” metal in Art Deco jewelry. The trend for white metal jewelry lasted for almost two decades and spawned the production of cheaper substitutes, most notably white gold.
In 1931, the Frank Capra film “Platinum Blonde”, starring Jean Harlow, introduced the term for a silvery-blonde bombshell to the English lexicon. The idea of a woman with a stunningly blonde mane is so seductive that many women still insist on dying their hair platinum blonde to this day.
In 1953, Eartha Kitt released the classic Christmas-themed song “Santa Baby“, which favorably references the precious white metal. In the song, Eartha pleads in a sultry voice, “Santa honey, one thing I really do need, the deed…to a platinum mine”.
Starting in 1976, the music industry introduced the platinum album, which certifies that an artist (in the U.S.) has sold 1 million copies of an album. This is twice as much as a gold album, which is awarded after the sale of only 500,000 copies.
By the 1980s, platinum-branded credit cards were rolled out en masse. Originally, credit cards were issued in gold and silver varieties, with the former being more prestigious than the latter. But once platinum cards were released, they displaced gold credit cards as “the best”, while silver credit cards were largely discontinued.
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The Extreme Rarity of Platinum
Platinum is an incredibly rare precious metal. Its estimated abundance in the earth’s crust is only between 3 and 5 parts per billion, which is similar to the estimated crustal occurrence of gold.
However, these statistics are somewhat misleading. In reality, platinum is much more difficult to find in economically feasible deposits than gold. In fact, over the ten year period from 2008 to 2017, gold was mined at a rate 15 times higher than platinum. In other words, platinum is 15 times rarer than gold!
Platinum’s mine supply imbalance with silver is even more extreme. There have been 131 ounces of silver mined over the last 10 years for every ounce of platinum mined. That ratio rises to 141 to 1 if you only look at the last 5 years.
Nor are we mining significantly more platinum than in years past. Platinum mine production in 2017 was 200 metric tons – about 6.4 million troy ounces. But this is almost identical to the ultra-rare metal’s mine production of 205 metric tons in 2003.
Mine production has clearly stagnated, which is mostly attributable to the fact that the price of platinum has not kept up with its increasing production costs. Right now about 70% of the world’s platinum is mined in South Africa. But the South African mining industry has been caught between persistently rising labor costs and declining reserves as decades old mines are slowly being exhausted.
A multi-year period of weak prices has completed the disaster, creating an industry-wide catastrophe for South African platinum miners. As a result, investment for the exploration and development of new mines in the country has ground to a near halt. Many South African mining companies have reacted to these weak business conditions by reducing capital expenditures, laying off workers and closing mines.
For example, major South African platinum producers Lonmin and Implats are both cutting production and laying off miners. Implats is closing 5 shafts and shedding 13,000 jobs over the next 2 years. Meanwhile, Lonmin’s latest corporate presentation reads like a funeral dirge as the company desperately tries to stay solvent until its planned acquisition by competitor Sibanye-Stillwater in late 2018.
Platinum as a Monetary Metal
Platinum is not only a noble metal, but also the most recognizable of the platinum group elements. And given its illustrious history, extreme rarity and superlative physical properties, I find it odd that some people don’t accord platinum a status on par with the other precious metals.
In my opinion, it is clearly as much a monetary metal as silver or gold.
I don’t believe it is possible to talk about precious metals and their monetary function in the 21st century without including gold, silver and platinum in the discussion (and probably palladium as well, but that is another topic). Yes, platinum is a renowned jewelry metal and has many industrial uses, but it is also fundamentally a monetary metal.
In fact, platinum was used in circulating coinage between 1828 and 1845 in Czarist Russia. Many of these beautiful early Russian coins have survived the intervening 180 odd years intact and are highly sought after by collectors today. When they do come up for sale, you had better get out your checkbook though, because you can’t touch one for less than about $2,000.
Although Russia’s initial monetary experiment with platinum didn’t last very long, it was an important waypoint on the precious metal’s journey into the world’s cultural conscience.
During the early 1980s Engelhard, Johnson Matthey and other major bullion fabricators began to issue smaller platinum bars intended for individual investors. I believe that this event marks the exact moment when platinum finally, indisputably arrived as a monetary metal.
Not wanting to be left out of the action, government mints also began issuing platinum bullion coins targeted at retail precious metal investors. The first of these was the Isle of Man Platinum Noble in 1983. Canada soon released the Platinum Maple Leaf in 1988, while Australia began striking its Platinum Koalas in the same year. The U.S. followed up with the American Platinum Eagle in 1997. The British Royal Mint arrived late on the scene with its Platinum Britannia bullion coins in 2018.
Today, platinum is often referred to as “rich man’s gold” – a nod to the fact that it has almost always been more expensive per ounce than gold since the beginning of the 20th century.
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How Undervalued Is Platinum Today?
The platinum-gold ratio is a time-honored way of calculating the relative value of the gray-white metal compared to gold. This number measures how many ounces of gold it takes to purchase a single ounce of platinum. Over the 30 year period from 1988 to 2017, the platinum-gold ratio has averaged 1.34. But as of December 2018 it is trading at only 0.67, which is half the 30 year average. In fact, the platinum-gold ratio is currently the lowest it has been in more than 100 years, signaling that the gray-white metal is extraordinarily undervalued versus gold today.
The platinum-silver ratio also shows the precious white metal to be substantially undervalued, although not quite to the same degree suggested by the platinum-gold ratio. Right now the platinum-silver ratio sits at 58, which is close to a 35 year low. This ratio has averaged 88 over the past 30 years, giving platinum plenty of room to run.
As discussed earlier in the rarity section of this article, platinum is currently trading below its cost of production in South Africa. It is estimated that average South African mine production costs hover in the $900 to $1,000 range, substantially higher than the $800 spot price. While this situation can linger for some period of time, it cannot persist forever. At some point, declining South African mine production will constrain supply, boosting the price of the unique metal.
Platinum prices have been quite volatile, booming and crashing twice in the last 15 years. The first time was during the 2008 Financial Crisis, when prices plummeted by more than 60%. A lot of this loss was attributable to the unsustainable run-up to $2,000 an ounce during the 2007-2008 commodities boom. So the metal went from a period of extreme industrial demand to one of low industrial demand in just a few months, which decimated the price.
More recently, prices peaked at more than $1,800 an ounce in 2011, only to grind inexorably lower over the next several years. Right now platinum is trading for less than half its 2011 peak – a trend largely driven by reduced demand for auto catalysts, which constitute approximately 40% of total platinum demand.
I think the metal’s price volatility has scared off a lot of investors who would otherwise have gravitated towards the rich man’s gold. However, this represents a great investment opportunity, as low prices are the time to buy, not sell.
The Bearish Investment Case against Platinum
Let’s talk about auto catalysts for a minute.
When precious metal or commodity investors express a bearish opinion on platinum, their argument almost always revolves around declining auto catalyst demand. But in order to understand this argument, we must first understand how platinum group metals are used in automobile catalytic converters.
For our purposes, there are three main classes of vehicles that we are concerned with. The first employ gasoline powered engines. These predominate in average households, where passenger vehicles like sedans, mini-vans, hatchbacks, sports cars and SUVs are the norm.
The second type is diesel powered vehicles. This includes most industrially-oriented vehicles, such as heavy-duty pick-up trucks, tractor trailers, dump trucks, box trucks and farm equipment. However, it is also important to note that there are some diesel passenger vehicles, primarily in the European market.
The third category of cars is electric vehicles, or EVs. These are cars powered by batteries that plug into a charger and do not consume liquid, petroleum-based fuel at all. Because of this, they don’t use catalytic converters. Tesla cars are probably the brand most associated with technologically cutting-edge EVs.
So here is how all of this applies to the platinum group metals. Cars that have internal combustion engines run on either gasoline or diesel. These vehicles need catalytic converters in order to eliminate pollutants, like NOx and CO, in their exhaust.
Platinum can be used in both gasoline and diesel engines, while palladium is only effective in gasoline engines. Therefore, all diesel engines in existence heavily rely on platinum-rich catalytic converters. Gasoline combustion engines can use either platinum or palladium.
This sets up a substitution effect. If the price of platinum gets too high, auto manufacturers can switch over to palladium for their gasoline-powered auto catalysts. If palladium becomes too pricey, they can switch back to platinum.
This isn’t just a theoretical concern for auto producers, either. They have switched back and forth between the two platinum group metals several times over the past two decades. For example, in the mid 1990s car companies largely adopted palladium because it traded at only $150 an ounce at the time versus $450 for platinum.
But then palladium experienced a debilitating bubble around the year 2000, with prices spiking to over $1,000 an ounce. This prompted these same car companies to switch back over to platinum.
More recently, auto makers went back to palladium in the late 2000s, after platinum rose to over $2,000 an ounce in 2008. They have been using palladium ever since, despite the fact that platinum is now cheaper than palladium by over $600 an ounce.
The reason that auto companies haven’t switched back to platinum for gasoline catalytic converters yet is because there are significant retooling costs associated with the change. So they have to be really, really sure they want to make the switch before they commit to it.
But it is clear that if either platinum or palladium trades at a large discount to the other for a prolonged period of time, then the less expensive metal will widely displace the other in gasoline catalytic converter production.
A big part of platinum’s problem is negative sentiment. Much of this has been driven by auto giant Volkswagen’s disastrous diesel emissions scandal. In 2015 it was discovered that Volkswagen was cheating on its diesel emission tests. This not only destroyed Volkswagen’s “clean diesel” reputation overnight, but also gave the entire diesel engine industry a black eye. Suddenly, diesel engines were seen not as the future of clean automobiles, but as an embarrassingly dirty technology to be replaced as quickly as possible by better alternatives.
Electric vehicles are largely seen as that better alternative.
According to the International Energy Agency, EV ownership is projected to increase from 3 million vehicles in 2018 to 125 million by 2030. Platinum bears believe that this massive increase in EV sales will lead to persistently declining demand for traditional internal combustion powered vehicles.
However, it is my opinion that the rise of electric vehicles is overblown. The widespread consumer adoption of EVs faces it own technical challenges. For example, a shortage of the metal cobalt, which is a key ingredient in the lithium batteries used in electric vehicles, could hobble its future growth prospects.
It is probable that we will only see modest EV penetration in the auto market over the next couple decades. Instead, I think it is far more likely that the market will be dominated by hybrid vehicles, like the Toyota Prius, which combine a relatively small battery pack with a low-displacement, conventional gasoline engine. However, because they still retain a combustion engine, hybrid cars require a catalytic converter.
Even if I’m wrong and EVs do come to dominate the passenger vehicle market, it will take many decades to come to pass. In a worst case scenario, the rise of EVs will have almost no impact on platinum demand anyway. This is because very little platinum is currently used in gasoline catalytic converters, as most of that market is dominated by palladium.
Platinum’s unassailable auto niche is diesel engines for commercial vehicles, which faces no realistic competition in the foreseeable future. This is in spite of outlandish announcements like Tesla’s semi truck – an all electric tractor trailer that can supposedly haul up to 40 tons of freight for 500 miles. The head of Daimler’s truck division agrees with my skeptical assessment of Tesla’s prototype electric truck, saying that:
“If Tesla really delivers on this promise, we’ll obviously buy two trucks – one to take apart and one to test. …but for now, the same laws of physics apply in Germany and in California.”
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The Bullish Investment Case for Platinum
We’ve already talked about the bear case for platinum, which more or less revolves around falling auto catalyst demand. But let’s change gears for a moment and consider the bullish investment thesis for the precious metal.
Put quite simply, platinum has everything other than auto catalysts going for it. I’ve already mentioned these points earlier, but I will summarize them here.
The gray-white metal is incredibly rare – much rarer than gold and insanely rare compared to silver.
Not only is it priced at multi-decade lows versus both gold and silver, but is also trades below its long-term cost of production.
Platinum is incredibly useful in modern industrial applications. If oil is widely considered the world’s most indispensable commodity and silver a close second, then platinum ranks third with its breathtaking versatility.
Platinum jewelry is unsurpassed in its strength, toughness and corrosion resistance. The well-to-do have coveted jewelry made from the lustrous gray-white metal for over a century now. And with good reason too – its properties cannot be duplicated by any other jewelry material known to man.
The final piece of the puzzle is platinum’s unassailable position in the public imagination. It is widely viewed as the most valuable of the precious metals, even if its current price does not reflect this reality.
Given all of these positives, I believe it is only a matter of time until the oversupply in the platinum market clears and prices skyrocket once more. Platinum for anything less than $1,000 an ounce is an absolute steal. But once it rises above that level, chances are that you will never see it again in your lifetime.
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