Written by: The MacroButler
While investors should by now be accustomed to the role of precious metals in their portfolios and the historical significance of physical gold and silver as money and a store of wealth, there is another side to precious metals that is less well known: the Platinum Group Metals (PGMs).
The platinum-group metals (PGMs), also known as platinoids, platinides, platinum metals, or platinum-group elements (PGEs), consist of six noble, precious metallic elements clustered in the periodic table. These elements are all transition metals located in the d-block (groups 8, 9, and 10, periods 5 and 6). The six PGMs are ruthenium, rhodium, palladium, osmium, iridium, and platinum. They share similar physical and chemical properties and are often found together in mineral deposits. However, they can be subdivided into two groups based on their geological behaviour: the iridium-group PGMs (IPGEs: Os, Ir, Ru) and the palladium-group PGMs (PPGEs: Rh, Pt, Pd).
Platinum was valued by ancient civilizations in South America, notably the La Tolita Culture, and in Egypt. It was used in ceremonial jewellery and mixed with gold, as seen in the 700 BC Egyptian Casket of Thebes. Indigenous cultures, like the Muisca Indians of Colombia, likely extracted and shaped platinum from ores through hammering, sintering, and annealing.
Platinum and platinum-rich alloys were known to pre-Columbian Americans, but the first European reference to platinum came in 1557 from Italian humanist Julius Caesar Scaliger, who described a metal found in Central American mines that couldn’t be melted with Spanish techniques. The name “platinum” comes from the Spanish word platina (“little silver”), as Spanish settlers in Colombia saw it as an impurity in their silver mining. By 1815, rhodium, palladium, iridium, and osmium had been discovered. Industrial PGM mining began in the 19th century, especially in South Africa’s Bushveld Complex, one of the largest known PGM deposits. Over the years, it was discovered that the Platinum metals have unique catalytic properties and are highly resistant to wear and tarnish, making them ideal for fine jewellery. They also exhibit resistance to chemical attack, excellent high-temperature performance, high strength, good ductility, and stable electrical properties.
The global Platinum Group Metals (PGM) market has been established for over 50 years, driven by industrial use in various applications. Known for their irreplaceable properties, PGMs are widely used in jewellery as well, but the biggest demand comes from automotive catalytic converters that reduce vehicle emissions. PGMs are used in numerous industrial processes, including petroleum refining, pharmaceutical synthesis, and in products like computer hard drives, pacemakers, and airplane engines. They are also sought for investment purposes, primarily in ETFs backed by physical metal or in the form of bars and coins.
With the projected decline in internal combustion engine (ICE) vehicle production, there’s growing availability of platinum, palladium, and rhodium, along with more favourable prices for palladium and rhodium. This creates a rare opportunity compared to other critical materials, like those used in lithium-ion batteries, where supply is tightening. PGMs benefit from well-established supply chains and infrastructure, ongoing investments in efficiency and sustainability, and high recycling rates. Their use is often driven by necessity, offering superior efficiency, low energy consumption, and minimal waste. Key advantages include:
- Strong availability and stable supply.
- A normalizing price environment.
- Mature circularity with high recycling.
- Low-intensity usage in various applications.
Platinum group metals (PGMs) are often classified as ‘critical metals,’ but their supply-demand dynamics are less constrained compared to other critical materials. Demand for PGMs is shifting to new technologies, often replacing older uses. For example, platinum’s role in internal combustion engine (ICE) vehicles is transitioning to fuel cell electric vehicles (FCEVs). PGM supply chains are well-established, with South Africa playing a dominant role. In 2023, PGM mining contributed 1.6% to South Africa’s GDP and nearly 10% of its merchandise export value. South Africa’s Bushveld Igneous Complex (BIC) remains a vast and rich source of PGMs, making alternative sources, like seabed or asteroid mining, unnecessary and unlikely to compete. Recycled PGMs, particularly from catalytic converters in ICE vehicles, will remain a significant supply source for decades. Even after ICE vehicle sales cease, as projected for Europe by 2035, PGM recycling from auto catalysts will continue to supply platinum, palladium, and rhodium well into the future.
In addition to catalytic converters, other above-ground sources of PGMs exist, many of which are part of closed-loop recycling systems, returning the metals to their original owners. Although not included in official recycling figures, this practice is common for all PGMs, including iridium and ruthenium. Effective recovery from newer materials, such as catalyst-coated membranes (CCMs) in PEM electrolysers and fuel cells, is already integrated into existing recycling processes. PGM refiners continuously innovate to enhance recycling for specific materials, such as recent advancements in recovering not only PGMs but also valuable membrane material (ionomer) from CCMs. For new PGM users, circularity is built-in, provided they ensure end-of-life materials reach appropriate secondary refiners.
While still in its early stages, demand for PGMs has been increasingly linked to the energy transition process. One key area is clean hydrogen production, achieved through either electrolysis or converting methane from fossil fuels with carbon capture. Hydrogen has numerous applications in transportation, industry, and power generation, and can also be converted to ammonia or other fuels. Proton exchange membrane (PEM) technology heavily relies on PGM catalysts—platinum in PEM fuel cells, and platinum, iridium, and ruthenium in PEM electrolysers. Platinum also acts as an anti-corrosion plating for electrolyser components. Additionally, PGMs are used in other fuel cell and electrolyser technologies, such as anion exchange membrane (AEM) electrolysers and phosphoric acid fuel cells, a mature technology used in South Korea. Solid oxide fuel cells (SOFCs), while not requiring PGMs directly, depend on PGM catalysts (rhodium, palladium, and platinum) for natural gas processing. These fuel cells are gaining traction for distributed power generation. The handling and transport of hydrogen, using ‘hydrogen carriers,’ also create PGM demand, with platinum and ruthenium often catalysing the processes for hydrogen storage and retrieval.
In hydrogen purification, platinum catalysts and palladium membranes are essential, with palladium also playing a role in hydrogen sensing. Altogether, PGMs are crucial in enabling the hydrogen economy and driving the transition to net zero.
Aviation, which currently accounts for 3% of global energy consumption, is another sector driving new demand for PGMs. As the industry pursues net zero, various technologies will rely on PGMs. Hydrogen-powered aviation, through either jet engines or fuel cells, is being tested for shorter-haul flights, while long-range flights require alternative fuels. While like uneconomical over the long term, the industry is focusing on sustainable aviation fuel (SAF), which can replace fossil jet fuel but is made from biomass or by combining clean hydrogen with captured CO2. Platinum catalysts are crucial in producing SAF from vegetable oils (HEFA or HVO), though this supply is limited. PGMs are also used in other processes to convert biomass and waste into SAF. Additionally, Fischer-Tropsch synthesis, which combines captured CO2 with clean hydrogen to create SAF, requires PGMs in electrolysis and purification processes. Thus, PGMs play a key role across the SAF production spectrum.
In a nutshell, there will still be strong demand for PGMs even if the internal combustion engine ceased to exist. Indeed, despite the gloomy outlook for internal combustion engines (ICE), platinum demand is projected to grow. Fuel cells, chemicals, and PEM electrolyser demand will replace the demand for catalytic converters. Over the past few months, ICE has made a comeback while the electric vehicle (EV) craze has cooled. The need for catalytic converters, and therefore for platinum and PGMs, has returned. Achieving zero carbon targets requires more than just catalysts. Fuel cells powering vehicles are becoming increasingly relevant, with platinum serving as a catalyst to accelerate chemical processes. So far, no alternative metal can replace platinum in fuel cells. By 2030, fuel cells are expected to account for 10% of platinum demand, and 28% by 2040.
On the supply side, PGMs come from primary and secondary source of supply. Mined supply is heavily concentrated in South Africa; Zimbabwe and Russia. PGMs are mainly extracted from dedicated PGM mines although some are mined as byproducts in nickel and copper mines. Mine production has structurally declined over the years due to geopolitical and environmental constraints that have impacted the profitability of mining PGMs in various countries. For example, global platinum mine production decreased from 6,073 thousand troy ounces in 2019 to an estimated 5,468.3 thousand troy ounces in 2024. This decline is primarily driven by reduced supply from South Africa, the largest platinum producer, as well as from Russia and countries like the US and Canada, where mining costs are significantly higher than elsewhere.
Like all other metal mining industries, the Platinum sector follows the CAPEX cycle. Over the past decade, the lack of investments has had noticeable consequences. Supply is steadily declining, and the need for new deposits to replenish dwindling reserves is putting pressure on companies. Investments to renew depleted reserves are essential for every miner. The basic heuristic in the mining industry is: The reserves growth rate must exceed the reserve depletion rate. In this context there has been a steady decline in reserves among major platinum mining companies. The reserves (blue) are part of the resource base (yellow and green). Converting resources into reserves requires time and capital, and little investment has been made in recent years. This is not the exception but the rule for mines producing PGMs.
The location of these deposits also explains why mining supply has been structurally declining over the years, in addition to the time required to discover, develop, and build a new mine. Of every 100 ounces of platinum reserves, 90 are in South Africa, 6 in Russia, and 2 in Zimbabwe. The remaining 2 ounces are in North and Latin America. South Africa is in an acute energy crisis which has impacted its mining industry, and Russia is partially isolated politically and economically. These factors make discovering new deposits and building mines even more challenging.
Supply PGM recycling set up in open and closed loops is essential to meeting global demand for PGMs. Out of every four ounces of platinum, one is obtained through recycling. However, this cannot compensate for the dominance of one country in the platinum supply. The statistics are clear:
- South Africa holds 90% of the world’s reserves of platinum, palladium, and rhodium.
- South Africa produces 73% of the world’s platinum and 42% of its palladium.
While one-quarter of the platinum supply comes from recycling, recycling faces two main headwinds:
- Higher interest rates result in higher car payments, leading to extended vehicle ownership and fewer catalytic converters recycled.
- Lifestyle changes, such as increased home office use and reduced mileage, also reduce catalytic converter recycling as people’s mobility has been structurally reduced.
The combination of more expensive vehicles and reduced mileage results in decreased recycling output. As 80% of recycling supply comes from catalytic converters removed from end-of-life vehicles, the trend in recycling supply is expected to structurally decline, especially if economic growth is lacklustre in the coming years.
In 2023, expected improvements in primary and secondary PGM production fell short. Plant maintenance and electricity shortages hindered progress at South African smelters and refineries, and a decline in end-of-life vehicles reduced PGM recovery from automotive scrap by about 14%. Despite significant Russian PGM sales to China, overall supply of platinum and palladium only slightly increased, while rhodium supply declined. Platinum, palladium, and rhodium faced notable deficits, but palladium and rhodium prices dropped sharply due to market liquidity and negative sentiment, with Russian sales to Hong Kong and mainland China supporting overall PGM supplies.
Despite significant deficits in palladium and rhodium, prices did not reflect this imbalance. Elevated prices in 2020-2022 led long-term holders to sell excess stocks, while industrial consumers also over-purchased to hedge against future price risks. As prices fell and concerns about supply risks eased, excess inventories were reduced, leading to a temporary drop in PGM purchases and some metal being sold back to the market. This trend was exacerbated by demand shifts, such as reduced palladium use in gasoline catalysts and lower rhodium content in glassmaking alloys. For palladium and rhodium, investor sentiment and increased liquidity further pressured prices. Both metals are still heavily tied to the automotive sector, which accounts for over 80% of their demand. With the rise of battery electric vehicles (BEVs) expected to create surpluses and no clear alternative uses, prices fell sharply. Primary PGM supplies increased in 2023, mainly due to a surge in Russian exports to Hong Kong and China. Russian palladium exports rose by 17% to 2.7 million ounces, and platinum exports more than doubled to 780,000 ounces. Following the Ukraine invasion and subsequent sanctions, Russian PGMs faced reduced trade with Western and some Asian partners, leading to unsold inventory from 2022. Starting in mid-2022, Russian PGMs were increasingly shipped directly to China, with significant discounts allowing them to partly displace imports from other regions and domestic Chinese refineries. However, declining Chinese palladium consumption limited the impact of these sales, while US imports of Russian PGMs were significantly affected by new import tariffs imposed in April 2023.
Releasing Russian above-ground inventories have pressured platinum and palladium prices. However, above-ground stocks, particularly in the West, are now at their lowest level since 1980. Given the significant deficit, above-ground stocks have declined to their lowest levels in records dating back to 1980, with further deficits expected in 2024 and 2025. On top of that, given the depressed prices, major miners have cut output because spot prices have fallen below their all-in sustaining costs (AISC). Currently, about 25% of miners’ AISC is above the spot price, resulting in negative margins.
It should be clear by now that over the past 4 years, Platinum and Palladium prices have grossly underperformed those of the most popular precious metals like gold and silver.
Performance of $100 invested in Platinum (blue line); Palladium (red line); Gold (yellow line); Silver (green line) since 31st December 2019.
The acute underperformance of platinum and palladium compared to gold and silver is due to the fact that, although they are precious metals, their prices are more influenced by industrial demand than by investor demand. In this context, the prices of platinum and palladium are more closely correlated with economic growth than those of gold and silver.
USD Price of 1 ounce of Platinum (blue line); Palladium (red line); Gold (green line) and US GDP Nominal Dollars YoY SA (white line) & US Recessions.
With platinum currently priced below $1,000 an ounce and having significantly underperformed gold and silver over the past four years, some investors might begin to view this price weakness as a buying opportunity. Historically, platinum reached an all-time high of $2,213 an ounce in March 2008, surpassing gold’s 2011 peak, driven by severe supply issues in South Africa at the time. Until 2015, platinum was more expensive than gold, but this trend reversed. As gold prices have been primarily driven by demand from central banks, institutional and retail investors in the Global South, and primarily Asia, the underperformance of platinum relative to gold has been more pronounced since 2020. This is because platinum lacks the same store of value significance for these investors as gold does.
Gold to Platinum Ratio since December 31st, 1987 & US Recession.
However, this could change as investment demand for platinum is rising, driven by increased coin and bar purchases in China. WPIC forecasts double-digit growth in China’s retail platinum investment this year, fuelled by perceptions of undervaluation compared to gold. In July 2024, China launched platinum futures contracts, allowing delivery of platinum in forms used by industrial consumers, potentially boosting investment demand. These new contracts may enhance platinum’s appeal by reducing premiums and buyback discounts. While it remains uncertain if platinum will regain its pre-2010s price parity with gold, current supply and demand dynamics suggest it could be a promising buying opportunity.
All three auto catalyst PGMs are expected to remain in deficit in 2024, despite a projected 5% decline in light-duty ICE vehicle production, slight improvements in autocatalyst recoveries, and continued sales from Russian stockpiles. The palladium shortfall is anticipated to decrease to around 360,000 oz, with demand falling 6% to 9.7 million oz, the lowest since 2016. Automotive use is forecasted to drop to 8.1 million oz, an eight-year low, due to a 4% contraction in gasoline car production and reduced output by Chinese automakers. On the supply side, a 4% increase in secondary palladium recoveries should balance out a slight decline in primary metal sales. ETF holdings of palladium are relatively low, under 600,000 oz, compared to nearly 3 million oz in 2014–2015. Heavy ETF redemptions could theoretically balance the market, but this would require selling more than half of the remaining holdings. The palladium market’s balance also depends on vehicle output, which may improve if gasoline car production stabilizes at 2023 levels, potentially adding around 200,000 oz to the demand forecast. Despite challenges like a slowdown in new orders and component shortages, recent industry forecasts suggest that ICE vehicle production may hold up better than anticipated in 2024. Auto recycling is another major source of uncertainty. The backlog of older vehicles still in use, which would typically have been retired by now, complicates predictions. It’s unclear how quickly vehicle scrappage rates will return to normal. While recycling might rebound more strongly than expected, there’s also a risk of disappointment due to a slowdown in new vehicle sales, continued tightness in the used car market, and cost-of-living pressures that encourage car owners to keep their vehicles longer.
Number of shares outstanding in ABRDN Physical Platinum ETF (white Histogram); ABRDN Physical Palladium (red Histogram).
The deficit in the platinum market is forecast to exceed half a million ounces again in 2024. Demand is expected to stabilise at around 7.6 million oz, with small decreases in automotive and jewellery balanced by an uptick in investment. Industrial consumption will be virtually unchanged. On the supply side, a fall in Russian shipments (following unusually large producer stock sales in 2023) should be offset by modestly higher recoveries from auto recycling, and slightly increased primary supplies from Zimbabwe and North America. South African platinum supply is forecast to be virtually flat, with releases of work-in-progress from producers’ refining pipelines largely compensating for a small decline in underlying mine output. These demand estimates allow for positive platinum investment of 120,000 oz in 2024, much of this in the form of coins and small bars, including new platinum products celebrating the Chinese Year of the Dragon issued by the Perth Mint in Australia and the People’s Bank of China. Net investment in the form of retail bar sales in Japan, and via exchange traded funds in other regions, was minimal during the first quarter of 2024. Platinum ETF holdings totalled nearly 3 million oz as of the end of March 2024, while Japanese retail investors also hold large quantities of metal purchased in previous years, so it is theoretically possible for disinvestment to balance the market, as happened in 2022 (when rising interest rates reduced the attractiveness of non-yielding assets, and dollar strength provided some profit-taking opportunities for platinum investors in other currencies). Historically, liquidation of large bar holdings in Japan has been favoured by sharp upward movements in the yen-denominated platinum price, but it is harder to anticipate the reaction of ETF investors.
Before investors consider adding platinum to their portfolios, they should understand that, over the past 20 years, platinum’s implied volatility has been nearly double that of gold and comparable to that of silver. Palladium is even more volatile than Platinum given the smaller size of its market. In layman’s terms, this means that adding platinum and or palladium to the antifragile part of a portfolio will increase its volatility.
3-Month At The Money Implied Volatility of Platinum (blue line); Palladium (red line); Gold (yellow line); Silver (green line).
Although platinum appears increasingly attractively valued compared to gold, its price drivers will likely remain influenced by geopolitics and government regulations related to climate change agenda, which will impact recycling supply. Indeed, Russia is the big unknown in this equation. Further sanctions on PGM exports to the EU imposed by the EU could act as a catalyst. Russia might also impose sanctions on PGM exports to the EU, leading to a potential parabolic price move in PGMs. Prices may reach levels seen in March/April 2022. At that time, the EV craze was strong, and PGMs were undervalued. Now, with the PGM deficit deepening, restricting 45% of palladium and 10% of platinum exports could trigger an exponential market response.
While the PGM deficit suggests higher spot prices for platinum and palladium in the near future, investors should consider the market’s challenges. On the positive side, slowing PGM production and low spot prices are pressuring South African miners, leading to the closure of high-cost operations, a trend exacerbated by power shortages. On the negative side, the green energy transition while it is uneconomical and unjustified has impacted and will continue to impact the pricing of PGMs. Ultimately, investors should keep in mind that unlike gold, which is primarily a monetary metal, PGMs and silver are mainly industrial metals. Thus, their price dynamics differ from those of gold and are more impacted by economic growth than by the search of an antifragile asset in the context of the weaponization of USD assets for those in the world who are not complying with the unipolar world view of those ruling the so-called western democracies.
In brief, PGMs are probably the least popular precious metals among investors. Given the uncertain future of supply and their reliance on industrial demand, only those with a high-risk appetite should consider adding platinum and palladium to their portfolios. While platinum and palladium are undeniably currently undervalued compared to gold, investors must be prepared to endure greater volatility than with gold and silver. In this context, they will need a ‘Taoist Patience’ to Make Platinum Great Money Again.
KEY TAKEWAYS.
- The PGM market, established for over 50 years, is driven by the unique properties of these metals and high demand in automotive catalysts, industrial processes, and investment products.
- Despite slowing economic growth, platinum demand is expected to rise, driven by its essential role in fuel cells and other applications, which will sustain significant demand over the next decade.
- PGM supply can be divided into primary sources from mining activities, mainly in South Africa, Zimbabwe, and Russia, and secondary sources from recycling industrial and automotive materials through open and closed-loop recycling processes.
- Out of every four ounces of Platinum, one is obtained through recycling
- Over the past four years, platinum and palladium have underperformed compared to gold and silver because their prices are more influenced by industrial demand and economic growth than by investor demand.
- Platinum priced below $1,000 an ounce and well below its historical ratio to Gold may attract deep value bargain hunters in ‘decentralized real assets’ in particular investors from the Global South who are looking to diversify their wealth outside USD assets.
- Before adding platinum to their portfolios, investors should note that its implied volatility has been nearly double that of gold and is comparable to silver.
- Adding platinum or palladium to a portfolio will inevitably increase its long-term volatility, but given their current relative valuation against gold and silver, it is worth taking the risk.
- To surf ‘Kamunism’, investors should focus even more on companies with low-leveraged balance sheets and strong business moats.
- Physical gold remains THE ONLY reliable hedge against reckless and untrustworthy governments and bankers.
- Silver, platinum, and palladium can be added to diversify the “antifragile” portion of a portfolio for investors seeking enhanced performance and willing to manage higher volatility.
- Gold is an insurance to hedge against ‘collective stupidity’ and government’ hegemony which are in great abundance everywhere in the world.
- With continued decline in trust in public institutions, particularly in the Western world, investors are expected to move even more into assets with no counterparty risk which are non-confiscatable, like physical Gold and Silver.
- Long dated US Treasuries are an ‘un-investable return-less’ asset class which have also lost their rationale for being part of a diversified portfolio.
- In such an environment, the risky part of the portfolio has moved to fixed income and therefore rather than chasing long-dated government bonds, fixed income investors should focus on USD investment-grade US corporate bonds with a duration not longer than 12 months to manage their cash.
- In this context, investors should also be prepared for much higher volatility as well as dull inflation-adjusted returns in the foreseeable future.
HOW TO TRADE IT?
Like physical gold and silver, the best way for those with the risk appetite to own platinum and palladium in a diversified portfolio is to hold the metal outright and store it in a private, secure vault outside the banking system. This approach is simple, clean, liquid, and less likely to bring negative surprises. However, investors must accept that trading and monetizing platinum and palladium bars is more difficult than with gold and silver, as these metals are less familiar to most laypeople and therefore will be more reluctantly accepted as decentralized, non-confiscable assets without counterparty risks. An alternative is to trade physical platinum and palladium ETFs, but this sacrifices the decentralized nature of physical ownership, as these ETFs are subject to stock exchange rules and the counterparty risk of the ETF issuer. For even more adventurous investors, PGM mining companies are an option. However, like gold and silver miners, while many of these stocks are attractively valued and under-owned, they exclusively operate in exotic jurisdictions like South Africa, Zimbabwe, and Russia, with only a few operating in Canada, which is ruled by WEF-affiliated green zealots. In these countries, including Canada, property rights can be ‘flexible,’ especially when metal prices rise, and the economic environment becomes more challenging for governments to satisfy their voters. Canadian-domiciled PGM mining companies also have the highest production costs in the industry, which, during times of depressed prices, could threaten the viability of their operations.
On September 12th, Russian President Vladimir Putin instructed the government to consider restricting exports of strategic raw materials such as nickel, titanium, and uranium in retaliation for Western sanctions. While platinum is not yet included in the preliminary list, this could change over time. Investors should be aware that if the conflict between Russia and NATO countries escalates, Russia’s platinum mined-supply could be impacted. As the world’s third-largest platinum miner, any potential export ban could remove more than 11% of the global mined platinum supply, inevitably driving prices higher, regardless of broader macroeconomic conditions.
As it is already evident that the 2020s are and will be a transformative period in world history, investors must stay focused on what ultimately matters for themselves and their loved ones. In this context, as Epictetus stated centuries ago, ‘everyone should remain attached to what is spiritually superior, regardless of what others may think or do.’
This article was originally published on The Macro Butler Substack on September 14th:
https://themacrobutler.substack.com/p/make-platinum-great-money-again
