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The Way It Is - Is Not The Way It Is


A fundamental reevaluation is beginning in the gold and platinum group metal markets (PGMs), though most seem to be looking at future expectations based on the way things are today. 

My view? The way it is today, is NOT, in fact, the way it is. At the moment gold futures are $1517; October platinum is $953.5, and the active palladium contract is $1594. Closely evaluating supply and demand is, of course, relevant.

But the real question is whether anything can radically change. Well, supply is a reasonably well known number, and industrial demand for the PGMs can be projected, based on traditional factors like GDP growth around the world. 

And here is what can change, dramatically impacting the market. New buying can totally overwhelm all of the PGM markets, and although the gold market is vastly larger, it, too, is dwarfed by the size of the world's money supply, and is equally exposed to changes in demand, both on the margin, and, naturally, with secular shifts into the metals. Demand can explode from the world's investors, industrial users, and government strategic buyers.

New buying? The US stock market alone has assets approaching $40 trillion, while the size of the annual supply of platinum is only $8 billion, and gold's annual supply is $250 billion. I believe that the markets are on the verge of recognizing that gold is in fact a currency that has maintained purchasing power throughout history;  and that the supply is tiny relative to not only investment assets, but world currency supply, which totals over $80 trillion, depending on what is included in that calc. And platinum, though with a more volatile price history relative to purchasing power, is even more vulnerable to a shift by the world's investors.

Who else could shift their perspective? How about industrial purchasing managers who absolutely need platinum or one or a combination of the PGMs for their industrial processes? Industry generally maintains relatively small inventories, even though without PGMs, their product line comes to a halt. While large industrial users often have supply contracts, things happen when markets get volatile.

Governments can also realize that their inventories of the critical and essential PGMs are modest at best, and with the exception of Russia, with the huge production at Nornickel, as well as massive in ground inventory, most countries, including the United States, do not even know that they are exposed.

So, I would strap on a seat belt. Although market participants are accustomed to see huge swings in stocks, somehow their expectations are far more muted when it comes to gold, platinum and the platinum group metals. I expect prices to be multiples higher from where they are today, not because of chaos or low interest rate levels that support the precious metals, but from a new understanding of how these small precious metals markets relate to the world's stock and currency flows. 

 

 


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