Platinum and Palladium: Industrial Use Metals Yield Portfolio Power

By John Manfreda

What makes an asset a powerhouse for your portfolio? ASI's answer is based on the metaphor of the three legged stool: your holdings must diversify across currencies, across countries and across investments.

When an asset does all three, it's a powerhouse.

Today, our focus is on platinum and palladium for reasons that are uncorrelated to any other precious metals buying opportunity. Platinum and palladium are mainly industrial use metals which are part of solutions to environmental issues around the globe.

We see platinum and palladium as growth performers. To us, they are an appreciation-oriented addition to the 5-10% of your net worth in gold and silver held as core holdings. Add them to your gold and silver and watch their growth alongside proliferating environmental programs.

Price trends for platinum and palladium are driven by environmental concerns and supply shortages. Prices are only somewhat correlated to inflation, unlike the price of gold or silver, or the fate of the stock market.

Price depends on demand. That demand is affected by the extent governments impose ever tighter emissions standards...especially for the growing automobile industries in China and India.

China's automobile sales surged 30.45% in the first half of 2014, keeping China as the world's largest auto market. China will continue to produce more autos, which in turn will lift the demand for palladium and platinum.

China weighs in similar to EU's Euro 5 strategy introduced in 2009 to cut pollution from autos by 40%. China's restrictions on emissions particularly promote diesel vehicles which increases demand for platinum.

In India, carmakers are not slowing down as sales continue to boom. The Society of Indian Automobile Manufacturers asserts, "...an integrated, holistic approach for controlling vehicular emission cannot be over-emphasized. More importantly, it is time now for the auto and oil industry to come together under the guidance of the Government in evolving fuel quality standards and vehicular technology to meet air quality targets."

Commodity strategist, Bart Meek of TD Securities concludes, "... auto-catalyst demand should strengthen in 2014, as production and consumption in Europe pick up. It hasn't been pretty in Europe... [But] even if we get a small positive next year that would be very, very material [for platinum]."

Platinum and palladium tend to mirror each other in price movement, but not perfectly.

Palladium has the advantage of being used in more ETFs, and is used for gas-fueled cars. Platinum is used for jewelry (sometimes called 'The Rich Man's Gold'), and for diesel-powered vehicles. At ASI, we do not pit them against each other. A powerhouse portfolio contains both.

Will the settling of labor strikes in South Africa mean lower prices for platinum and palladium?

We don't think so. It's true the international story about the supply of platinum and palladium has changed recently. The mining strikes in South Africa have been settled and an agreement has been reached.

South Africa accounts for nearly 40% of the annual palladium mine output and 80% of the world's platinum. With the Association of Mineworkers and Construction Union problems behind us, many assume supply will soar, driving prices down.

Not so. In their 2013 research report, Johnson Matthey placed both platinum and palladium in a deficit worldwide, with deficits expecting to continue through 2014.

With the South African depletion, Russia took over the top supplier position. Together, the two countries account for 80% of the world's palladium supply and 70% of the world's platinum supply. But, disturbances and government regulations curtail supply in Russia, as well.

For example, Russia has been slowly selling off its palladium stockpile for years, with steady stockpile declines of 800,000 ounces in 2011, 400,000 ounces in 2012, and an estimated 200,000 ounces in 2013. Many estimate that Russia's palladium reserves are now depleted.

Despite the strike settlements there remains a deficit.

Marking eight years of continuous deficits, industry consultants Johnson Matthey Plc reported platinum consumption in 2014 will exceed supply by 1.22 million ounces, as opposed to the 940,000 ounce shortfall in 2013. With the supply/demand palladium gap growing to 1.61 million ounces in 2014, from 371,000 ounces in 2013, this marks eight years of continuous deficits.

That would constitute the largest market deficits ever, based on Johnson Matthey data going back to 1975 for platinum and 1980 for palladium.

Our prognosis is ten years of low supply with growing demand for platinum and palladium.

In the face of slipping supply, the EPA in the U.S. and its counterparts in just about every industrial nation and in many developing countries, are dealing with pollution.

The long and the short of it is this: platinum and palladium are needed for catalytic converters to reduce pollution, and will experience continuing demand as governments create and enforce rules.

For example, the aforementioned EU rules have yet to take full effect. The enforcement date is September 2014 into 2015. Europe's diesel-fired vehicles tend to use more platinum than palladium, putting both metals on the environmental gravy train, alongside the China diesel preference.

Palladium is more common in the emission-control equipment of gasoline engines, still the leader in the U.S.

With the mega-trend in anti-pollution, the only question remaining is - What form of platinum and palladium to choose for your portfolio?

PERTH MINT CERTIFICATE PROGRAM

For platinum, consider our Perth Mint Certificate Program (PMCP). Platinum is less liquid than silver and gold when it is time to sell. The PMCP gives you a document that is immediately liquid anywhere in the world. Furthermore, you'll enjoy free storage at the Perth Mint in Perth, Australia. Your holdings are guaranteed by the Government of Western Australia and are 100% insured by Lloyds of London.

Best yet, the Perth Mint Certificate offers platinum for a very low premium above spot price. You'll realize significant savings on the purchase of the underlying metal.

ASI PRECIOUS METALS DIRECT

If you like to trade online – whether it be for delivery or for storage domestically or internationally, a convenient option for both platinum and palladium is ASI Precious Metals Direct. You can purchase both palladium and platinum bullion coins and bars, including Platinum Eagles, at any time.

Use any smart phone, tablet or computer to access your account 24/7 and trade during normal trading hours. You may store platinum in Singapore, Zurich, New York and Salt Lake City, and palladium can be stored in New York and Salt Lake City.

If you are looking for a generational purchase for children or grandchildren, call us at 877-340-0790 and stash away some platinum Eagles as gifts, or for a college war chest. After all, we see long-term gains in these metals. You can also open a Uniform Transfer for Minors Account (UTMA) for children under the age of eighteen at www.ASIPMDirect.com, and make gift contributions on a regular basis.

What to do next.

Because platinum and palladium price trends are driven by environmental concerns and supply shortages, they are uncorrelated to gold and silver buying opportunities. We see them as growth performers facing years of low supply but with growing demand. We believe your core portfolio should contain 5%-10% of your net worth in precious metals, with gold and silver in addition to platinum and palladium. If you store internationally, you will be giving your holdings diversity across currencies, across countries and across investments, thus creating the powerhouse portfolio.

For bullion in the form of coins and bars, the Perth Mint Certificate Program and any directly purchased physical metals, call 877-340-0790 to speak with your ASI Preferred Client Relations representative and talk through your options.