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Platinum’s Discount to Gold
Falls to $370, Can the
Gap Continue to Narrow?

Recently, the discount between platinum and gold has fallen to less than $370, its lowest since late May, having dropped quite sharply from around $412 just a few weeks ago. This begs the question if platinum has the potential to continue outperforming gold, thus further narrowing the differential between the two.

To understand the prospects for the platinum price it is important to recognise what has driven recent gains. In our view, there are two issues. First, sub-$800 prices (which lasted from mid-August until mid-September) encouraged bargain hunting, as investors believed that the platinum price had reached a low point. These purchases were confirmed by some of our US contacts in the retail coin and bar market. There were also times when platinum actually outsold gold, although this also reflects how poor US retail gold demand has been (a function of range-bound prices discouraging retail investment in the yellow metal). Bargain hunting also emerged in the ETP market, with global holdings on 7th September of 2.57Moz their highest since mid-May.

The second factor benefiting platinum prices has been the shift in favour of risk-on trades as investors have shrugged off the potential fall-out from escalating trade disputes. This has driven the S&P 500 to record highs, wiping out the losses suffered during the correction at the start of this year. Growing investor risk appetite has also benefited base and industrial metal prices. For the latter, palladium has made the most significant gains, but the platinum price has also strengthened. By contrast, the lack of risk aversion has weighed on gold. This in turn partly explains the recent narrowing of the discount between the two metals. That said, while platinum prices should rise over the short-to medium term, we do not expect this gap to fall significantly further.

The most important reason why we believe the platinum-gold discount is unlikely to fall towards the $300 threshold concerns platinum’s largely unsupportive fundamentals. Looking first at the supply side, although low rand platinum prices have precipitated modest South African supply rationalisation, gains in the palladium rand price have supported revenues and will help maintain current production rates. Furthermore, while Sibanye-Stillwater has proposed a sharp drop in capital expenditure at Lonmin (should the acquisition proceed), meaningful supply cuts are only expected in 2025. Returning to this year, we therefore expect global mine supply to slip by 2% to 6.0Moz.

A similar decline of 2% is predicted for global platinum demand. Here, the two largest areas are automotive and jewellery, with respective shares of 41% and 28% of fabrication demand in 2018. Both are facing downward pressure. A key challenge for automotive platinum demand concerns lost market share at the expense of light duty gasoline vehicles in its all-important European market. As a guide, this year Europe is expected to account for around half of global platinum autocatalyst fabrication (covering light and heave duty vehicles), of 3.2Moz. According to LMC Automotive, light duty diesel accounted for just over 36% of total car sales in July, compared with around 41% in January (it was last over 50% in late-2016). Although diesel’s share in Europe appears to have stabilised over the past four months we still expect global automotive platinum to drop by 3.7% in 2018 to 3.2Moz.

Turning to platinum jewellery, the estimated 2.6% fall to 2.2Moz this year owes much to ongoing weakness in China. This in turn reflects the industry’s continued attempts to adapt to evolving consumer tastes, such as the shift in favour of light weight, more design oriented pieces.

Overall therefore, we believe that the platinum market will generate another physical surplus this year, of around 190koz. By itself, this is not significant. However, this will mark the seventh surplus since 2010, which means that platinum’s above-ground stocks, will have risen by some 2.2Moz between end-2010 and end-2018, to a noteworthy 8.8Moz. This unsupportive backdrop suggests that the trend in the platinum price will be largely dependent on gold. The latter is expected to strengthen over the medium term as an eventual slowdown in the US economy encourages investors to gradually rotate towards risk-off assets. We also expect the dollar to weaken as the above dynamic encourages the Fed to adopt a more dovish stance. We therefore expect gold to average around $1,330 in 2019, against $940 for platinum, a discount of $390.

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