Hitch a Ride on This Supply Crunch

Louis James, Chief Metals & Mining Investment Strategist

Dear Reader,

Short and sweet here. We're not gold bugs, in the sense of gold being the only thing we care about. We do, however, still see gold as an absolutely essential wealth preservation vehicle. We also see more upside in precious metals stocks as a class than almost anything else in the financial world.

That said, various indicators are still bearish for gold in the very near-term, so we've recommended more GLD puts as "insurance" for the downside, and are looking for opportunities to diversify. We've written about platinum and palladium as vehicles for doing so before, but now the upside in both is looking increasingly imminent.

Jeff Clark has an update on the "other" precious metals below. Whether or not you want our recommendations on how to play it, the analysis should help guide and support your investment strategy.

Good hunting,

Louis James
Senior Metals Investment Strategist
Casey Research

Rock & Stock Stats
Last
One Month Ago
One Year Ago
Gold 1,243.70 1,342.60 1,728.20
Silver 19.83 22.79 33.35
Copper 3.20 3.34 3.50
Oil 94.84 98.30 87.38
Gold Producers (GDX) 22.25 26.02 48.08
Gold Junior Stocks (GDXJ) 32.50 40.76 88.40
Silver Stocks (SIL) 11.50 13.59 22.93
TSX (Toronto Stock Exchange) 13.478.34 13,248.06 12,153.10
TSX Venture 932.15 971.68 1,248.36

Hitch a Ride on This Supply Crunch

Jeff Clark, Senior Precious Metals Analyst

Can you name a commodity that's currently in a supply deficit—in other words, production and scrap material can't keep up with demand? How about two?

If you find that difficult to answer, it's because there aren't very many.

When you do find one, you might be on to a good investment—after all, if demand persists for that commodity, there's only one way for the price to go.

At the end of 2012, the platinum market was in a supply deficit of 375,000 ounces. Much of it was chalked up to the sharp decline in output from South Africa, where about 750,000 ounces didn't make it out of the ground due to legal and illegal strikes, safety stoppages, and mine closures.

The palladium sector was worse: It ended the year with a huge supply deficit of 1.07 million ounces—this, after 2011, when it boasted a surplus of 1.19 million ounces. The huge reversal was due to record demand for auto catalysts and a huge swing in investment demand—going from net selling to net buying in just 12 months.

What's important to recognize as a potential investor is that the deficit for both metals isn't letting up, especially for platinum.

Let's take a closer look…

Will the Supply Deficit Continue?

According to Johnson Matthey, the world's largest maker of catalysts to control car emissions, palladium supply will decline to 6.43 million ounces this year, largely due to lower Russian stockpile sales. But the company claims the decline will be made up by a 7.4% increase in recycling.

Ha. Projections on scrap supply are almost always wrong. Analysts said in early 2012 that supply from recycling would grow 10-12% that year—but it declined by 4%.

There are critical issues with scrap this year, too, especially with platinum…

  • Impala Platinum ("Implats") reported a 17% decline in output, not due to decrease in production but in scrap supply. Other companies have not reported this problem, but Implats is one of the biggest producers of the metal.
  • Recycling of platinum jewelry in China and Japan is falling and is on pace to be 12.9% lower than last year.
  • European auto sales are declining, so one would think demand would be the most impacted. However, this has major implications for supply, too: The average age of a car in Europe is eight years, with more than 30% over 10 years old. When a vehicle exceeds 10 years, the wear and tear on the catalyst is so significant that a substantial portion of the platinum has already been lost. So the jump in supply many are anticipating will be much less than expected.

Some of these declines are offset by scrap from auto catalysts in the US, but this obviously hasn't made up for all of it.

Demand Isn't Letting Up Either

Platinum demand is driven mostly by the automotive industry and jewelry, which account for 75% of world demand. What happens in these two sectors has a significant impact on the metal.

We'll let you draw your own conclusions from the data…

The Cars

  • Auto industry analysts forecast total monthly sales in the US last month will reach about 1.23 million for passenger cars and light trucks, up 12% from 1.09 million in October 2012.
  • China, the world's largest auto market, saw a 21% rise in passenger car and light-truck sales in September to 1.59 million units, an eight-month high.
  • PricewaterhouseCoopers forecasts that sales of automobiles and light trucks in China will have nearly doubled by 2019. This trend largely applies to other Asian countries too, becoming a constant source of demand for both platinum and palladium.

The Politicians

Both platinum and palladium will benefit from new regulations that take effect in 2014 in Europe and China:

  • Europe's new "Euro 6" emission regulation will force diesel vehicles to have new catalysts going forward.
  • China has already accepted tighter emission standards that will substantially push platinum demand in the country. It's worth mentioning that car markets in China and other emerging countries are at the "Euro 4" level, so they have some catching up to do before reaching US and European levels.

The Investors

NewPlat, a platinum exchange-traded fund, launched in South Africa on April 26 and has already seen an inflow of 600,000 ounces through the end of September. This unprecedented surge is expected to lift platinum investment demand by 68% to a record 765,000 ounces.

The Jewelers

Jewelry is the second-largest use for platinum, representing 35% of overall demand.

China dominates this market, and demand has doubled in the past five years. According to ETF Securities, China is well on its way to make up around 80% of total platinum jewelry sales in 2013—their report calls Chinese platinum demand "a new engine of growth."

Johnson Matthey expects the interest for platinum jewelry to soften in China this year. However, a recent article in Forbes suggests the opposite may be happening:

A good proxy for Chinese platinum jewelry demand is the volume of platinum futures traded on the Shanghai Gold Exchange. Average daily platinum volume on the exchange in 2013 is running near 45% above 2012 levels, recently reaching a new record high this year.

Another indicator of Chinese platinum jewelry demand is China platinum imports. The latest data on China platinum imports for September showed the highest level since March 2011 at 10,522 kilograms (or approximately 338,300 ounces).

And this from International Business Times

Net platinum inflows into China hit their highest levels in two and a half years … China's net imports of platinum rose by 11%, to hit almost 70 metric tons for the first three quarters in 2013, higher than the 62 metric tons from the same period last year.

Overall, platinum demand is expected to be greater than ever before, reaching a record 8.42 million ounces this year. And this while supply continues to decline.

This supply/demand imbalance will likely continue for at least several years, perhaps a decade. Prices haven't moved all that much yet, but that doesn't mean they won't. Prices of commodities with a supply/demand imbalance can only stay subdued for so long before reality catches up. Either prices must rise or demand must fall.

We already recommend the best vehicle to play this worsening supply crunch to our subscribers—but you can buy this fund at a better price now than when we first recommended it. And it's a great way to diversify your precious metals portfolio. Get the name of this fund and our recommendation with a risk-free trial subscription to BIG GOLD. Try it for 3 months with full money-back guarantee—click here.


Gold and Silver HEADLINES

China to Start Gold Swaps Trading (Reuters)

The Shanghai-based "China Foreign Exchange Trade System" began gold swaps trading today, November 25. Swaps trading, which gives additional hedging tools to bullion banks, comes in line with other steps China has taken to open up its gold market and increase financial investments. The measures are timely, as the country is set to overtake India as the world’s top gold consumer this year. Demand is predicted to reach 1,000 tonnes (32.1 Moz) from gold jewelry, bars, and coins.

Germany Cuts Gold Holdings for Second Time in Five Months (Mineweb)

Germany, the world's second biggest holder of gold reserves, cut its bullion holdings in October for the second time in five months, the latest data from the International Monetary Fund shows. Last month the country sold 3.421 tonnes (0.1 million ounces) and now holds 3,387.247 tonnes (108.9 Moz) of gold in Reserves.

Gold holdings by central banks are closely watched since the official sector became net purchasers in 2010 after two decades as net sellers. Changes in central banks' buying and selling patterns tend to affect global gold prices.

It should be noted, though, that the Bundesbank said it sold the gold for coin minting.

Gold Rush in Space? Asteroid Miners Prepare, But Eye Water First (Reuters)

Could mining in space move from science fiction to commercial reality?

Two companies, Planetary Resources and Deep Space Industries, will launch prospecting missions to passing asteroids within three years. Meteorites—pieces that survive and fall to earth after asteroids disintegrate in the atmosphere—have been found to contain significant amounts of precious metals like platinum, rhodium, iridium, rhenium, osmium, ruthenium, palladium, germanium, and gold.

Some asteroids are very rich in resources. For example, according to estimates by Planetary Resources, some platinum-rich asteroids just 500 meters across could contain more than the entire known reserves of platinum group metals. However, experts say before going for gold or platinum, the mining industry must find the most precious resource of all—water.

Fun to read about, but mining in space is still in a galaxy far, far away.


This Week in International Speculator and BIG GOLD—Key Updates for Subscribers

International Speculator

BIG GOLD

Nov 25, 2013
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