Investors and analysts are still concerned about the dollar. In fact, just recently Citigroup raised its platinum price forecasts for 2009 and 2010, saying “a rocky outlook for the dollar and concern over inflation were likely to boost precious metals prices in the years to come,” according to Reuters.
But it also raised its forecast for other precious metals including gold and silver. The bank said “it expects gold prices to average $940 an ounce this year, up from a previous forecast of $908, and $966 in 2010, up from $925. It sees silver prices at $14.30 an ounce this year, rising to $16.10 in 2010.”
Platinum prices are rising not only over concerns for the U.S. dollar, but also because of supply and demand issues. South Africa, a large producer of the metal, has experienced mining shutdowns due to power shortages.
According to The Washington Post, “electricity demand so outstripped supply in late 2007 that Eskom, the state-owned power company, began rationing, plunging cities into occasional darkness and causing temporary shutdowns in one of the world's major mining sectors. Mining output plunged 11% in January 2008, sending platinum prices to record highs.”
The problem still exists. Bloomberg reports, “Eskom rationed supplies to large customers including platinum mines to about 90% of normal levels after the near-collapse of the electricity system last year.” Eskom says a decision is needed “within the next 12 months on what expansion is necessary to meet growing electricity demand beyond that which it’s already planning.”
The problem is so severe that it could hamper South Africa’s economic recovery. The closing of mines shut off platinum supplies from mines, which produce almost four-fifths of the world’s supply of the metal.
Platinum is used in many industrial ways, including automobiles. Some analysts suggest platinum prices have been given a temporary boost “by the late-summer recovery in the auto market, which has been attributed to the government’s temporary ‘Cash for Clunkers’ program,” reports Fox News.
“The stimulus could be a Catch-22 for these metals as it and similar programs in Europe have led to the recycling of nearly three million cars. ‘A whole lot of platinum and palladium is set to hit the market from these destroyed cars,’ said Jon Nadler, senior analyst at Kitco Bullion Dealers Montreal.”
Taipan’s global international investment editor, who has traveled to South Africa firsthand, says supplies of the metal are so low that if you were to pour every single ounce into an Olympic-sized swimming pool it would only be ankle deep.
“That’s not nearly enough to absorb even small bumps in the supply chain – and platinum mining is about to go through the biggest disruption for at least 20 years – and perhaps ever,” says Sara.
You see, South Africa produces 79% of the world’s platinum supply – and holds 88% of platinum stockpiles. But South African miners, after a short strike earlier this year, are preparing for a long, drawn-out battle. Management and workers are far apart, and if companies pay worker demands, they’ll have to save money by closing multiple shafts.
“In other words, either there will be no production, or reduced production. No matter what, supplies are going to take a big hit. An investment in platinum makes perfect sense. As supplies dwindle and demand continues, investors could see huge gains investing in platinum-related companies,” says Ms. Nunnally.
Sara Nunnally is a contributing editor to Taipan Insider, a twice-a-week e-mail available to an exclusive list of readers. You can learn more here.
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