While gold has tended to dominate headlines as it passed $1,500 (£959) per ounce and headed towards $2,000, some of its rival precious metals have been overlooked, partly because of their lower prices and partly because of their volatile nature.
Silver is the obvious starting point when expanding into precious metals. It is sometimes known as ‘poor man’s gold’ because of its high correlation with its gold counterpart.
However, silver trades at a much lower price than gold, currently sitting just above $33 an ounce compared with gold’s $1677.5 per ounce, which makes it more easily traded. However, it also means the price changes can be extreme.
Last year, silver peaked at $48.70 per ounce on April 28 before dropping down to a low of $28.16 on September 26 and then jumping again to its current price.
Silver and other precious metals including platinum and palladium have different demand drivers to gold, where roughly 75-80 per cent of demand is driven by jewellery or investment, while for silver, platinum and palladium industry is a much bigger player. Catherine Raw, co-manager of the BGF World Mining fund, notes: “That means you have a slightly different dynamic – you have a slightly higher correlation to the global economy. A good example would be the platinum industry, when you had the US and European car manufacturers damaged in the financial crisis, which hurt platinum prices.”
However, in terms of silver, one of the biggest surprises recently has been the industrial demand for the metal to be used in photovoltaic cells for the solar panel industry.
She adds: “You can’t just say I’ll buy silver because it is correlated to gold. There are other things that impact it. In the early 2000s, the negative was the move from film photography to digital photography, as silver used to be in film quite a lot and now isn’t needed in digital photography.
“So we saw huge inventories build up between 2001 and 2004 but they’ve now been worked through over time and we’re in the position where we have new sources for industrial demand.”
Meanwhile platinum and palladium have also seen some significant price changes, with the former dropping as low as $844 per ounce in November 2008 as the financial crisis hit in the wake of Lehman’s collapse from a peak of $2,050 per ounce in May 2008.
It is now steadily increasing and currently sits at $1,627 per ounce, while palladium hit a low of $192 in October 2008 before hitting a peak of $823 in February 2011 and then falling back to its current level of $678.
Unlike silver, which benefits for demand from jewellery and investment as well as industry, the major driver of platinum and palladium is for use in the car industry and primarily in auto catalysts.
However, while platinum tends to be used diesel engines and larger cars, palladium is featured more in petrol engines, particularly smaller petrol engines manufactured in Asia.
The European car industry has therefore been very important for the platinum price in the past decade, as it is much more diesel orientated. However, Ms Raw points out recent strength of car manufacturing has been from Asia, particularly Chinese manufacturers, with China recently overtaking the US as the largest car producer in the world.
“When you look at the platinum-palladium outlook, on the demand side you have to have a view on the strength of the European and US car manufacturers versus Chinese car manufacturers. Both will be positive for platinum and palladium, but one will be more positive for palladium than for platinum,” she says.
Daniel Sacks, co-portfolio manager of the Investec Global Gold fund, notes in 2011 the platinum price started the year strongly, up 13 per cent over January as supply disruptions out of South Africa and improvements in global demand helped to lift the metal.
However, he adds: “We remain cautious on the outlook for European automobile sales. With exposure to Europe being the greatest for platinum, we feel that the current macroeconomic environment is not conducive to strong volumes.
“Furthermore, a lack of emissions legislation change next year – and a diesel to gasoline ratio that has normalised – creates little new demand for the metal. Notwithstanding this demand outlook, there is every opportunity for South African supply to disappoint.
“As increased focus is applied to safety and cost pressures continue to mount, the producers are unable to produce the desired amount of platinum profitably.”
Ms Raw agrees that the supply side challenges for platinum in South Africa means the investment environment has been poor for a number of years, and adds if you believe on a five-year view that US and European demand is going to recover, then investors can be quite bullish on the platinum price.
Mr Sacks notes that, while short-term demand for platinum remains uncertain, the long-term story remains intact, so this coupled with supply that continues to disappoint will deliver a tight market in a few years’ time.
Although some palladium is sourced from South Africa, the majority comes from Russia, and while demand for the metal is slightly stronger than for platinum the country is an unpredictable swing supplier.
“For much of last year they didn’t sell anything and then in October/November they sold a lot and that impacts the price unpredictably. No-one is absolutely sure how much they’ve got left and on that basis the supply side is much harder to predict,” explains Ms Raw.
“For both platinum and palladium we are relatively positive on prices given the supply side challenges we see across the board, but that doesn’t necessarily make us want to be hugely large owners of the companies themselves because the prices are not yet high enough to significantly improve the investment and profitability outlook.”
Nyree Stewart is deputy features editor at Investment Adviser
