If You’re Merely Worth Your Weight in Gold, You Could’ve Bought Platinum Instead and Gone on a DietSixteenth-century Spanish Conquistadors, who routinely discarded as a nuisance the puzzling silver-white nuggets they often found when panning for gold in New Granada (now Colombia), obviously never heard of Lonmin PLC. Shares in the British firm, one of the world’s largest platinum miners, leaped 25% in London trading on Friday, February 17, as the company revealed it has been in “very preliminary talks” that could result in its sale. Lonmin’s acquisition would represent merely the latest in a spate of mining industry takeovers spurred by soaring precious metals prices.

Over the last 6 months, thanks to a wave of consolidation and burgeoning physical and investment demand for their output, 4 of the 5 best-performing industry groups in an otherwise mostly restrained U.S. stock market are metals or mining related, according to Dow Jones & Co. And nowhere have the underlying fundamentals been stronger than in platinum, the only one of the 3 best-known precious metals to eclipse its 1980 price peak and burst to new all-time highs.

Supply and Demand

Anglo American PLC, a large, diversified miner that produces gold, platinum and diamonds, followed rivals Rio Tinto and BHP Billiton when it increased its capital-return program (to $1.5 billion, 50% more than promised last October) in late February. Mining businesses remain flush with cash as China continues consume a growing amount of natural resources in its push toward modernization. Anglo American CEO Tony Trahar declared, “I think China’s integral to the success of all commodities companies today.”

Purchases of platinum by Chinese auto manufacturers surged between 35 and 40 percent (from about 80,000 oz. to 110,000 oz.) in 2005, on strong growth in car production and more stringent vehicle emissions limits. Last year marked the sixth straight annual increase in platinum purchases for use in autocatalysts worldwide. In 1974, new air quality regulations in the U.S. ignited an explosion in the use of autocatalysts, which are coated with a solution of chemicals and platinum group metals to transform noxious vehicle exhaust into safe compounds. Now, more than 85% of vehicles sold globally are fitted with catalytic converters.

Industrial use of platinum grew a respectable 5% in 2005, but autocatalysts (46%) and jewelry (30%) still accounted for over three-quarters of total demand. Jewelry demand actually fell for the third consecutive year, by 6%, amid skyrocketing prices. Platinum’s relentless bull market caused jewelry consumers to scramble for cheaper alternatives. As a consequence, Johnson Matthey, the leading platinum distributor, projected a 70% jump in Chinese demand for the increasingly popular and more affordable platinum group metal palladium.

China remains the world’s biggest market for platinum jewelry, but its demand for autocatalysts still pales in relation to Europe, which accounted for fully half of the record 3.86 million oz. of platinum bought by automakers in 2005. European sales of diesel-powered light vehicles are booming and average diesel catalyst loadings increased to meet tighter emissions standards required last year under Euro IV. Autocatalysts convert 90% of hydrocarbons and carbon monoxide and 30%-40% of particulate matter found in diesel exhaust into carbon dioxide and water vapor. The continent’s auto manufacturers purchased greater than 15% more platinum last year than in 2004, as the market share of diesels in Western Europe approaches 50%.

Much of the price rise in precious metals in 2005, however, was attributable not to physical demand but to intense fund buying. Individual investors continued to pour cash into mutual funds specializing in the sector. The net non-commercial position in NYMEX platinum futures climbed from 130,000 oz. around the beginning of the year to almost 550,000 ounces in early October. At the same time, speculators amassed a net long position of some 650,000 oz. to 700,000 oz. on the TOCOM (Tokyo Commodities Exchange), while the metal’s price closed in on $1000 for the first time since 1980. You can now buy ETFs (Exchange-Traded Funds), like iShares Comex Gold Trust and StreetTracks Gold Shares that hold actual gold bullion, which has also hit a 25-year high. Investment demand was responsible for 26% of the record $53.7 billion in gold demand in 2005, vs. just 14% for jewelry consumption. At the end of January 2006, silver threatened to reach the $10 level for the first time since 1985 on optimism that Barclays Global Investors’ proposed silver ETF, iShares Silver Trust, might be moving closer to approval.

Rekindled inflation fears and the desire for a store of newfound wealth contribute to investor demand for precious metals in developing countries like China and India. China still has the lowest per-capita consumption of gold in the world, but the biggest Asian central banks hold a small proportion of total reserves in gold compared to their western counterparts, leaving them with ample room to add to holdings.

Plenty of central banks around the globe, however, control vast quantities of gold they might sell, and this potential source of supply continues to overhang the market. Also, a substantial majority of dollars devoted to metals exploration is spent looking for gold.

At least 18 small firms that emerged in South Africa in the past 12 months are vying to compete with behemoths like Anglo Platinum and Impala Platinum by seeking financing, though their projects won’t yield full production for another 5 years, if ever. Bringing a new mine on line can take years by the time you factor in the tasks of prospecting, obtaining legal clearance, building infrastructure, and frequently fighting opposition by environmentalists.

South Africa, where the metal was discovered in Transvaal Province in 1925, is the world’s largest platinum provider by far, having replaced Canada in that role since the 1950s. Russia was the main producer for an entire century ending with the conclusion of World War I, and still supplies most of the platinum mined outside South Africa, which contributed 78% of the total global supply of 6.59 million oz. in 2005, according to Johnson Matthey. With slower-than-expected growth in South African output, that figure still represented a shortfall when compared to 6.71 million oz. worth of overall demand, and probably helped buoy prices.

Counter-cyclical Tendencies

Given the length of the current bull market in stocks, which started in 2002, investors eyeing the exits or at least contemplating a defensive move toward increased diversification might want to consider a strategy that could offer protection in event of an economic or market downturn. In several bear markets throughout history, precious metals – and sometimes even the securities of the companies mining them – have demonstrated ability to weather inflationary storms or severe international financial crises.

In the last major cycle of inflation during the 1970s, gold stocks turned decisively higher in the months before the final stock market top on January 11, 1973, then they really took off. By the time the first bear market leg down in blue chip stocks bottomed on August 22, 1973, with the Dow Jones Industrials down 19%, gold stocks were ready for a breather. Amid a potent 16% snapback rally by the Dow lasting until its derailment by the Arab Oil Embargo on October 26, 1973, ASA Ltd., a closed-end investment fund concentrated in South African mining companies, dipped from $44 per share to $43.75. Venerable gold miner Homestake edged down from $42 to 41-7/8. After that, both stocks, along with the rest of the industry, resumed their meteoric rise into the following year. Homestake vaulted 330% from its 1973 low of 23 to a peak of 99 in January 1974. ASA similarly rose from the mid-20s to over $100 by the third quarter of 1974. Once the bull market in gold stocks gave way, though, Homestake nearly made a round trip, collapsing all the way back to 29 in the late summer of ’74. The metal itself, however, sustained its powerful uptrend throughout the worst stock market year since the Great Depression, rising from a low of $34.75/oz. (below its longtime fixed price of $35) as late as 1970, to an apex above $195 at the end of 1974, when President Ford signed an executive order allowing Americans to again hold gold in any form for the first time since FDR took away that right in 1933.

In the Depression years, gold and gold stocks also bucked the trend. President Roosevelt removed the nation from the gold standard after taking office in March 1933 and, after outlawing direct ownership of the metal, proceeded to ratchet its price upward from the old $20.67 to $35. Homestake, then the foremost gold producer, rose from as little as $145 to $373 a share in 1933 alone. By 1936, the stock reached $554, about 10 times its level a decade earlier.

Maturity of the Precious Metals Bull Markets

The ongoing bull market in stocks since 2002 may be no spring chicken, but what does that make the precious metals bull markets, which started in late 2001?

If gold can creep back up to another fresh post-1980 high, it would stamp the yellow metal’s February 2006 price decline as nothing more than an 8 th significant correction in a prolonged bull market. Before taking their latest detour, gold prices rose almost incessantly in a 6-week, 17% march skyward that began from under $500 an ounce in the days before Christmas and culminated in an April contract high of 579.50 on February 2. The biggest part of the move came on the heels of a year that saw gold advance 18%, silver up 30% and platinum higher by 13%. Despite its laggard behavior in 2005, platinum has already enjoyed its second-longest cyclical bull market, rising nearly 170% since establishing a climactic bear market low of $406/oz. on October 2, 2001.

That final low, interestingly, represented a 49.25% reduction in the metal’s price from an even $800 on April 25, 2000. Some of the most extraordinary precious metals bull markets have followed bearish interludes that cut prices roughly in half. In the gold market, both prices and supply rose in correct anticipation of legalized bullion buying in the U.S. before 1975. In a textbook example of “Buy on the rumor; sell on the news,” gold then plunged 47% in 20 months. A historic wave of inflation ensued, sweeping gold’s price from $104 at the end of August 1976 to $850 in January 1980. Platinum bottomed 6 months before gold, but staged an almost equally spectacular rally from $135/oz. to $1045 in March 1980. After all that frenzied buying, platinum imploded to beneath $240 an ounce by mid-1982, uncharacteristically trading cheaper than gold.

What to Make of the Recent Sharp Declines in Precious Metals’ Prices

Platinum and gold prices have since reestablished a more normal relationship. But although platinum easily bested its historic high by climbing to $1094 basis the nearest futures on February 3, while gold and silver came up far short of their 1980 tops, the precious metals subsequently fell almost in perfect unison. By around mid-February, platinum had dropped over 9% to under $1000, silver went from challenging resistance near the $10 level to testing support above $9, and gold was down only slightly less dramatically, by more than 7%. Metals prices recaptured much of the lost ground by Friday, February 24 with help from an attempted terrorist attack on a Saudi oil facility, only to retreat anew on Monday along with crude after an uneventful weekend.

Crude oil, like platinum, broke out to new all-time highs a couple of years ago, then sharply sold off. The setback merely served as a springboard on the way to $69.81 per barrel – a level 73% above the old peak and representing a 96% gain from its bottom following the initial breakout. Copper, too, launched a runaway advance after vaulting to fresh highs in the commodity inflation that arrived with the 21 st century. However, the current platinum bull market is much more mature than either energy or copper were when they first broke out.

Is the bull market in precious metals finally over, or have we just witnessed a correction? If this is only a correction, how long will it last? Could the halving of platinum prices in the last bear market lead to a historic advance of the kind seen in 1976-80, or will it fizzle like so many lesser bull markets have in the succeeding generation? What does the attainment of new all-time highs by platinum portend, when gold and silver remain well off their highs? Can precious metals extend their winning streak without the impetus of higher prices for gasoline and crude, which topped last summer on damage inflicted by Hurricane Katrina?

We recently asked all of the above questions – and carefully provided answers based on 200 years of market data and the timeless investment precepts of W.D. Gann – in a precious metals Special Report and a special 2-part series of High Content Reports on platinum. Both can be yours while there’s still time to act by checking out our Complete Forecasting Service.

About the Author:

James Flanagan is the president and founder of Gann Global Financial. In 1978, while majoring in economics at Claremont McKenna College, he acquired his first book written by W.D. Gann, “How to Make Profits Trading in Commodities.” This set in motion his passion to validate the claims of this early pioneer of market psychology and technical analysis. In April 1990, he launched his first newsletter Past Present Futures which has been in continuous publication since that time. James Flanagan oversees all of the research and research development at gannglobal.com.