Potential of Platinum

There are quite a few precious metals - gold, silver, platinum, palladium, ruthenium, rhodium, osmium and iridium - with the first four being the most known. Gold is the most traded, silver is the most used, however platinum offers quite a unique prospective on this sub-sector. Approximately 50% of the platinum demand is in vehicle use, 30% in currency and investments, 10% in industrial uses, and 10% in jewelry.

It is primarily used for catalytic converters in vehicles. Although gas powered cars can have catalytic converters made with palladium, diesel (being less refined than gasoline) powered vehicles need between 1/10th to 1/2 oz of platinum. This is materially significant because catalytic converters are governmentally mandated. One caveat to this is that purely electric cars do not need platinum, however these are a rarity, especially in thinking of the cost of power if these became mainstream. Hybrid, traditional gas and diesel vehicles all use platinum.

The US and Canada, as well as the European Union are operating under Euro 5 Emissions standards. China is at Euro 3 but progressing. Moreover, for the first time in history China purchased more cars than the US, demonstrating increasing demand from developing world with a growing middle class poised to purchase first cars, not replacing existing ones, so more will be initially bought.

Platinum is also becoming a significant jeweled metal. Wedding bands, necklaces and bracelets are being made of this material more than ever. China is now branding platinum (not gold) as the \"metal of the new China.\" Capitalizing on the Chinese pride of progression and a gaining middle class, this too becomes significant.

In terms of currency and investment purposes, platinum followed gold and silver, by having an ETF created. On January 8, 2010, both a Platinum and Palladium ETF, were launched. ETF Securities Ltd. created Physical Platinum Shares (PPLT) and ETFS Physical Palladium Shares (PALL). Both are listed on the NYSE Arca (formally American Stock Exchange). Both physically hold their respective metals in a vault, like the GLD ETF. This created a new consumption market, available to anyone with a brokerage account. The platinum ETF currently has about 300,000 ounces.

It is necessary to note that new ETFs have different tax treatment than stock funds. From the prospectus for ETFS Physical Palladium Shares: \"Under current law, gains recognized by individuals from the sale of 'collectibles,' including physical platinum, held for more than one year are taxed at a maximum federal income tax rate of 28%, rather than the 15% rate applicable to most other long-term capital gains.\"

The final aspect of platinum that is intriguing is where it comes from. Over 80% of the world's platinum comes from South Africa. Platinum is mined following veins in a mineralized reef. Most of the \"low hanging fruit\" has been mined forcing the miners to go deeper. High grade platinum is about 8 grams per tonne (2202 lbs). That is comparable to a few pencil shavings in a SUV sized rock. To mitigate cost, as little waste rock is mined as possible, so this is all underground mining ... not open pit. Putting this into perspective, the veins of the reef are seldom more than one to one and a half meters in width, meaning as close to four to five feet is mined away as possible. Following the \"low hanging fruit\" analogy, these platinum mines are also progressively getting deeper, up to one mile below ground and going further.

These mines are extremely narrow and low, often a person can not physically stand up in one. They are one mile underground, pitch black and must be air conditioned. The temperature can reach over 150 degrees Fahrenheit. This honestly sounds like a specific layer of hell, as throughout this process the roof may collapse.

South Africa also poses a unique geological monopoly on platinum, but has its own domestic issues which affect platinum. The most relevant is the power. South Africa has an aging power grid and a significant population consuming power. Platinum spiked to over $2200 US per oz in late 2008 as power outages became prevalent in South Africa. Platinum mining is extremely power intensive and impossible to mine with out air conditioning mines. Since they have opposite seasons South Africa is soon going to have summer, and will be hosting the 2010 FIFA World Cup, straining an already strained system.

Platinum is more in demand than ever in the consumption of cars in developing nations, increasingly desired in jewelry, easily bought and sold with the advent of ETFs, and extremely difficult and costly to mine. With all of there factors, one may argue platinum is poised to spike. I believe this is a play on China. Chinese consumption, or lack thereof, of vehicles and new draw to jewelerize platinum will determine its price.