Gold-Platinum price gap narrows as economy heads for recession

The gold price and the platinum price are beginning to move in opposite directions as fears of a world recession take hold. Although prices for both metals rose in initial reaction to Iraq’s invasion of Kuwait, gold although volatile, has maintained some modest gains, while platinum has dropped off significantly. As a result, the gap between the two precious metals, which has fallen to as low as $24 in recent weeks, is approaching a 5-year bottom. At presstime, gold was trading at US$364 and platinum at $US393 compared with US$401 and US$496 on Aug. 15, shortly after the invasion.

While platinum does have a role to play in the investment market, its importance as an industrial metal is far greater. Consequently, fears of a world recession and the resulting effect on demand for metals has depressed the platinum price, said Peter Cavelti of Cavelti Capital.

“Platinum is more linked to the boom-and-bust cycle than gold because gold is essentially a monetary metal,” he said. “The shock that an industrial commodity takes when economies reverse is very damaging.”

Platinum’s link with the automobile industry has left it particularly vulnerable to demand fluctuations. About 40% of the world platinum supply is used in the manufacture of auto catalysts, but as recessionary fears fester, the automobile industry will be one of the first to suffer a downturn.

A floundering Japanese economy also has platinum forecasters worried. A once-booming jewelry market in the country would deteriorate quickly if Japan entered a recession.

On the supply side, news that JCI of South Africa plans to develop a new, 192,000 oz.-per-year platinum mine also has a depressing effect on the platinum price. At a time when several mines are expanding their operations, the new output could lead to oversupply.

But what has kept and, over the long term, will probably continue to keep platinum from trading at a discount to gold is the expanding market for auto catalysts, said Cavelti. New exhaust emission regulations to be introduced in Europe during the early ’90s and a precedent-setting emissions law in California will be a boon to auto catalyst manufacturers, keeping platinum prices buoyant.

A downturn in the demand for new cars does not mean a proportionate reduction in the use of platinum in auto catalysts, said an Oct. 4 editorial in Metal Bulletin. “The latter is a relatively new market, starting from a base of zero, and the potential for consumption there is huge.”

Cavelti, who believes North America is just entering its recessionary period, believes the gold-platinum price gap could continue to shrink in response to weakening global economies.

“For the time being we are going deeper into the hole,” he said. “What I see when I look into my crystal ball is that . . . platinum will continue to underperform gold.”

But as the economy begins to strengthen once again, Cavelti sees some potential for platinum, both as an investment commodity and industrial metal.

“Two to three years from now, as we leave the slow environment in which we are now caught, platinum as an investment will continue its evolution.”