This article was originally published on my new site and newsletter, Contrarian Profits.
The panic selling in precious metals is giving us a special contrarian treat. I'm talking about a former inflation hedge sweetheart that's being unfairly dumped and is now trading very close to its cost of production.
But as savvy resource investors know, the cure for low prices is low prices. They know that when the price to make something drops below the price you can sell it for, less will be produced.
If you listen to commodities guru Jim Rogers respond to the talking heads on CNBC when asked for his favorite resource pick, he tells them he begins his research by looking at what's down the most.
That's where we take our clue and spotlight a "manic" metal that sometimes trades as a store of value, like gold and silver. At other times the metal – platinum – changes hands like an industrial metal, ruled by supply and demand.
Too bad these days it's being kicked to the curb like an unloved, unwanted inflation hedge. Yet it is still on the hook to meet industry demand. We need it for clean air, and consumers desire it for high-end jewelry.
This means the current price of platinum – just $1,319/oz. - is a real problem.
Demand for platinum should surpass supplies by a record amount this year – anywhere from 200,000 ounces (according to mining giant Lonmin), to 844,000 ounces (according to HSBC).
If the price drops more, South African miners – who produce more than 70% of the world's supply – will probably cut more production.
In fact, the two largest platinum miners – Anglo American Platinum and Impala – say their cost to get it out of the ground is $300 to $500 more than today's "street" prices.
Yet platinum demand is more stable than its cousins. Unlike gold and silver – whose long-term trends depend heavily on investor sentiment – platinum's demand comes from two steady sources:
- Nice Jewelry - About half of the platinum mined each year goes to the jewelry industry. China is the big consumer, and its demand is steady.
- Auto Emissions – Platinum is also used to clean up the air we breathe. It's a key component in cars for filtering vehicle emissions. Demand is growing, with more cars on the road and tightening emissions standards (even in China and India).
Platinum is not usually recycled – it is mostly "used up" for good. The only new supply is the amount dug up each year.
Platinum is already down more in dollar terms than you'd expect – maybe luring some investors into this trade early. This is because platinum's "native currency," the South African rand, has been weak. So mining costs are actually a bit lower than usual.
Beaten up with gold and silver, to four-year lows.
(Source: StockCharts.com)
The recent smack down of money-printing hedges, and selling from early traders giving up, presents us with a very interesting risk/reward setup. As contrarian investors, it's time to consider taking the other side of this panic selling.
There are some easy ways to own platinum thanks to ETFs. My favorite is the ETFS Physical Platinum Shares (NYSE:PPLT), because they actually have the stuff – they buy and store the platinum in vaults.
Most investors don't know the current carnage in the precious metals is tanking the price of platinum below viable levels. That means now is the time to buy, or as Warren Buffett would say, "Be greedy when others are fearful."
