Platinum in the Spotlight as Investor Demand Grows

Platinum, long considered the dull sister of the three major precious metals, lately has been a leading lady. But before investing, be aware of its higher risks and pitfalls.

Although it is rarer and more expensive than gold or silver, platinum has until recently received little attention from investors, hurt by its somewhat dull light color, high price volatility and lower liquidity.

But that is changing. Demand from investors--while still only about 15% of total platinum demand--has nonetheless grown tenfold this decade, from a mere 40,000 ounces in 1980 to 400,000 ounces now, according to Bruce Kaplan, senior vice president of A-Mark Precious Metals, a Santa Monica wholesale metals dealer.

Such growing investor demand has been a key element in a 20% rise in platinum prices since October, to $615.90 an ounce on Friday--the highest since June--up from $507.40 on Oct. 1 for the spot contract traded on the New York Mercantile Exchange. That has far outpaced gains in gold and silver.

Contributing to the gain have been recent declines in the U.S. dollar and prospects for rising oil prices, says Jeffrey A. Nichols, a New York precious metals investment manager. Both portend higher inflation, which boosts all precious metals--seen as strong inflation hedges.

But platinum enjoys more favorable supply-demand conditions than gold or silver, experts say. While silver supplies are in surplus and gold supplies are about even with demand, consumption of platinum is expected to outstrip demand for possibly the next two years, Kaplan contends.

One reason for the shortfall: The phasing in of catalytic converters in cars in Europe, Kaplan says. Use of catalytic converters to reduce air pollution is a major source of platinum demand worldwide. Also boosting prices has been strong buying by Japanese, whose demand for platinum in jewelry lately has been stronger than for gold, Kaplan says.

Also, industrial applications are expanding much more rapidly for platinum than for other precious metals, with new uses being found in fertilizers and in technologies to convert chemicals to electrical energy, he says.

“Platinum has the best supply-demand fundamentals of the three precious metals, without question,” Kaplan says.

Also, demand from investors has been boosted sharply by the introduction within the past three months of two new investment-oriented coins, the Canadian platinum Maple Leaf and the Australian Koala. They are the first platinum bullion coins to be issued by major nations. (Bullion coins are oriented toward investors because they are worth only the market price of the metal itself, as opposed to so-called numismatic, or collector’s, coins, which usually sell at prices far above the metal’s value.)

Until then, there had only been one platinum bullion coin, the Noble, produced by the Isle of Man, a tiny British crown possession in the Irish Sea. And Mexico is expected to launch a platinum bullion coin of its own next year, the Libertad.

The Koala, introduced in August, boasted sales of more than 100,000 ounces in its first two months, exceeding the Australian government’s projections for the entire first year, Kaplan says.

“With major nations issuing platinum coins, you really do have a major validation of platinum as an investment,” Kaplan says. “Sales of the Koala have been phenomenal, and I expect the Maple Leaf to do as well.”

Both the platinum Maple Leaf and Koala can be bought from coin dealers for a 6% to 8% premium over the prevailing market price for the one-ounce size, Kaplan says. The platinum Maple Leaf, introduced in November, and the Koala also come in one-tenth, one-quarter and one-half-ounce sizes.

The advantage of coins over bullion bars--the main way in the past for investors to buy platinum--are numerous. For one, coins are far more easy to handle and store, and there are many more dealers willing to buy and sell them. Dealers often require that bars be assayed--tested for their purity--before they will buy them. Such assays will cost you a fee and could delay the sale.

But be aware of drawbacks in platinum investing. While demand for the metal has grown, the market is still far smaller--and thus less liquid--than for gold and silver. So there are still not as many dealers who buy and sell them as gold and silver coins. And you will probably pay higher premiums to buy them and get slightly less of a premium when you want to sell them.

Also, platinum prices are more volatile than gold and silver prices, largely because the market for platinum is so much smaller, allowing speculators or major investors to move the market in the same way that the Hunt brothers of Texas moved the silver market in 1979-80. Also, about 81% of platinum supplies worldwide come from a small region of South Africa, thus making production highly vulnerable to strikes or other disruptions.

Accordingly, platinum prices have been much higher--they hit $1,040 an ounce in 1980 and were as high as $676.70 in 1986--but also sank as low as $237 in 1985.

Finally, not everybody is bullish for continued price gains, arguing that most of the rises for the next few months may already have occurred. Some argue that recession--not inflation--is the major risk facing the economy. Recessions--and resultant decline in industrial demand for metals--don’t bode well for platinum, silver or gold.

Because of these and other risks, many advisers say small investors should buy platinum only as a long-term investment. And for diversification, don’t invest more than 10% or 15% of your investable funds into precious metals.

Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.