What You Need to Know About Platinum Investments.
Before you dive into the metals market, it's important to understand how unpredictable platinum investments can be.
Although gold and silver receive the most attention, another precious metal has grown in popularity with investors: platinum.
Platinum is an industrial metal that is used in a variety of industries and manufacturing processes, as well as in health care and jewelry. The automotive industry – where platinum is used in catalytic converters alongside other metals such as palladium – is the primary demand factor, accounting for approximately one-third of global demand over the last five years, according to the World Platinum Investment Council, or WPIC.
Platinum is therefore more rare and difficult to extract than gold due to its deeper location in the Earth's center. This combination of scarcity and widespread demand could result in a profitable investment opportunity, but platinum is not for the faint of heart. Consider the following for prospective commodity investors:
- Platinum in comparison to gold.
- Purchasing platinum.
- Platinum: Is it a wise investment?
Gold vs. Platinum
"Investing in platinum is similar to investing in gold, silver, or copper," says Josh Simpson, a financial advisor with Lake Advisory Group. "What distinguishes platinum from the others is its scarcity." Platinum is approximately 30 times rarer than gold, the WPIC says, due to its low concentration in the Earth's crust.
South Africa and Russia supply the bulk of platinum. "Since a large portion of production comes from two nations, their political stability has an impact on the metal's price," Simpson explains. "The more stable their regimes, the less expensive they are."
He asserts that platinum is more affected by supply and demand than gold is by fear. "When the dollar is poor, it results in a decrease in the supply of platinum, which is usually bought in US dollars," Simpson explains. "A shortage of supply results in a rise in price."
This, along with its concentrated stock, represents both advantages and disadvantages of investing in platinum, depending on the state of the planet, he says. For example, demand for platinum increased in the fourth quarter of 2020 as the global economy started to recover from the pandemic. Meanwhile, platinum availability was reduced due to a plant shutdown in South Africa. This resulted in a rise in the price of platinum during the quarter, despite a fall in the price of gold – a trend that continued into 2021, when the price of platinum increased by more than 20% while gold dropped 15%.
Platinum also outperformed gold during the 2008 financial crisis, outperforming gold by between 30% and 65%.
Thus, while there is a case to be made for investing in platinum, it is not without risk.
"Because the price of platinum is far more volatile than the prices of gold and silver, investing in it is not for the faint of heart or novice investors," Simpson explains. "With shorter investment horizons of three to five years, wild price swings in both directions are possible."
After skyrocketing between 2007 and mid-2008, when it outperformed gold by up to 65%, the price of platinum fell more than 60% between May and December 2008. It finished the year with a price that was almost identical to that of gold.
"We view metals as a tactical play, which means that timing is critical," explains Dana Anspach, founder and CEO of Sensible Money, LLC. "You are frequently betting on a short-term price movement, perhaps triggered by an anticipated supply shortage in this case, but how long will that shortage last?"
When investing in platinum – or any precious metal, she says – you must have a simple exit strategy in place. "Will you sell when the metal reaches a predetermined price, a predetermined percentage benefit, or when you believe consumer demand will shift?"
Given platinum's price instability, Anspach states that it's important to consider the tax implications of a short-term gain. Short-term capital gains are taxed at ordinary income rates rather than long-term capital gains rates on investments kept for one year or less.
Tyler Landes, a fee-only financial advisor with Tandem Financial Guidance, believes that betting on a single metal is certainly too risky for the average investor. He refers platinum investors to more varied offerings, such as a wider natural resources fund, a hard asset fund, or a precious metals fund.
The iShares MSCI Global Metals & Mining Producers ETF (ticker: PICK) is a commodity exchange-traded fund that provides exposure to companies engaged in metals extraction and development. PICK is currently ranked No. 1 by US News & World Report among equity precious metals ETFs. Anglo American Platinum, based in South Africa, is one of the fund's assets. It is the world's largest producer of platinum.
Platinum: Is It a Sound Investment?
As is the case for any investment decision, the decision to invest in platinum is a personal one.
"To decide if platinum is a good investment for you, conduct research and consult with a financial advisor who can provide you with an accurate evaluation of whether or not you can invest in platinum at this time," Simpson says. "Always consult a fiduciary because they are legally and ethically obligated to put your interests and concerns first."
A fiduciary cannot be compensated for the assets or goods they recommend, so you don't have to worry about them recommending platinum to you solely to line their own pockets.
"Commodity investing is not for all. It makes no difference if it is precious metals or crops. The investor's level of experience, risk tolerance, financial situation, and time period should all be considered when determining if an investment is a successful one "Simpson asserts. "Just because a coworker is involved in something does not mean it is right for you."