Sell Platinum / Buy Gold

We are advising holders of platinum to switch out of the white metal and into gold.


Although QE3 is expected to take place in September, platinum’s upside will be limited by high inventories. Whilst it is true that there is little downside potential given that its price is below the cost of production, its large physical market surplus will likely cap gains in the next few years. More production will need to be curtailed by the largest platinum producers to restore prices to levels where there should be profitable returns. However, increasing rates of recycled platinum supply may create even more challenges for the industry. Nomura forecasts a cumulative surplus of nearly 1m oz in 2015.

Lack of Industrial Demand

The European auto sector is in the doldrums and no other commodity is more impacted than platinum, with the sector accounting for 20% of total platinum consumption. Industrial production in the Eurozone is expected to decline until Q2 2013. Positive US and Chinese auto demand is not enough to make up the losses, particularly in China where only a minority of these cars are fuelled with diesel. Ongoing substitution to palladium in diesel cars is also weighing on platinum.

Switch into gold

We believe that platinum’s discount to gold will likely persist over the next 12 months, and therefore recommend increasing the allocation to the yellow metal.

Catalysts for higher gold prices

Higher liquidity, record-low US real rates, inflation expectations and a depreciating USD are all positive factors for the rest of 2012. Physical demand for gold also remains strong. Specifically, central bank gold buying has continued unabated with preliminary IMF data pointing to gold purchases of 4.64 million oz in the March-May period, the second-largest purchase in a 3-month window since February 2010. More impressively, ETF gold holdings set a new record earlier last month.

Only an unexpected improvement in the economic conditions in the US and the Eurozone would put-off central bank intervention and undermine higher prices. Goldman Sachs has a Y/E price target of $1,840/oz (vs. a current level of $1,600).