Be Ready for Rebound in Platinum - BUY!
The platinum price took a heavy beating when the Great Tohoku Earthquake struck Japan on March 11 and seemed to recover afterwards before retreating recently.
Sources: I-Net Bridge; Plexus Asset Management.
The recovery and subsequent recent decline was more a reflection of cross-rate movements of the US dollar than anything else as the platinum price in terms of euro has remained in a very narrow range since the end of March.
Sources: I-Net Bridge; Plexus Asset Management.
The weakness of the platinum price is more apparent if it is compared to gold. Since Japan's twin disasters, platinum's premium to gold has been in a downtrend, falling from $366 to $270 or by 26.2% at Friday's close.
Sources: I-Net Bridge; Plexus Asset Management.
In terms of euro the premium fell to 191 from 234 or 18.4%.
Sources: I-Net Bridge; Plexus Asset Management.
But why the massive hit on platinum?
The Japanese auto industry was hit particularly hard by the earthquake and tsunami that followed. Japan's production of cars and trucks fell by 535,000 units or 57.3% in March compared to March last year. Toyota was scheduled to resume production in the second half of April, but only to 50% of normal production. If I assume that only 50% of cars and trucks were produced in April compared to last year, this will mean a loss of another 313,000 vehicles. If production in May returns to 75% of the same month last year, another 180,000 vehicles would have been lost compared to last year's total production of 9.5 million cars and trucks. Those production losses add up to a staggering 1,028 million vehicles or nearly 11% of 2010 production! The impact of the Kobe disaster in January 1995 was miniscule compared to that of the twin disaster in March. I estimate that the production of only approximately 40,000 units were lost in January that year while production returned to normal in February.
Japan consumed a gross 535,000 ounces of platinum for auto-catalysts in 2010. It therefore means that Japan's auto industry uses on average 0.054 ounces of platinum per vehicle. It therefore transpires that since March platinum demand from the Japanese auto industry alone has dropped by approximately 58,000 ounces. That excludes the ripple effect of supply disruptions in other countries such as Malaysia that saw auto production in that country slipping by 24.7% in April. I will not be surprised if the loss of the total demand for platinum in the global auto industry this year could add up to in excess of 100,000 ounces or 1.7% of last year's total supply. While it seems small, the 100,000 ounces should be compared to the average investment demand of approximately 55,000 ounces (2008-2010). That is huge!
The big question is when the platinum price will start to recover. I think it is generally accepted that this time the damage to Japan's economy and infrastructure is significantly worse than after the Kobe disaster. The main difference between now and then is that the yen has not been allowed to weaken against the US dollar to the same extent as in 1995 when Japan's exports to the US were seriously hampered.
Sources: I-Net Bridge; Plexus Asset Management.
Immediately after the twin disaster Japan's export markets were also supported by the weakening of the yen against the euro.
Sources: I-Net Bridge; Plexus Asset Management.
I think it is only a question of time before platinum's premium to gold will be restored. In 1995 it took approximately 53 working days after the disaster before the premium started to open up. We are now on the 45th day!
Sources: I-Net Bridge; Plexus Asset Management.
In 1995 we saw a jump of more than 10% in the platinum price when the market realized the underlying value of the metal compared to other precious metals. Will we see it again? Well, take a look at what the professionals are saying!
Sources: CFTC; Plexus Asset Management.
Where the net long futures position of non-commercial traders on NYMEX tumbled in the week of the twin disaster, net positions have increased by 8,489 contracts or 424,450 ounces from a low of 18,503 contracts in the second half of March and are currently approaching the pre-disaster levels.
I am adding platinum to my portfolio!
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
Copyright © 2008-2012 Dr Prieur du Plessis
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