Why Have PGMs Fallen Off a Cliff?

September 23, 2008 | By | 1 Reply More

For the last three weeks our attention has been claimed by the extraordinary and ongoing events affecting financials in particular and the knock on consequences to markets in general.

To very briefly sum up, the irrational euphoria that greeted the Paulson/ Bernanke news last Friday was quickly replaced as worldwide markets opened deeply in the red on the realisation of the consequences of their bail out proposals.

The sector that was a significant exception was our very own favourites, gold and silver. The $900 an ounce level was breached before falling back to the mid eighties and as we write (06.30 ET) is again knocking on the door at $895 an ounce.

We foresaw this week’s situation and expressed our opinions on the site last Friday. Unfortunately we cannot claim any great abilities in reading the markets on this occasion, simply common sense, a factor sadly lacking both in many market players, analysts and other assorted financial whiz kids pontificating in the media last week.

This is our excuse for our attention being drawn away from PGM (platinum group metals) precious metals but, as it happens, the situation has not much changed since our last coverage.

The melt down in platinum, palladium and rhodium prices had occurred prior to the banking crisis coming to a head.

These metals are not normally subject to the intense speculative activity that stock and commodity markets in general enjoy.

As a consequence the major players are much more influenced by their perceptions of the fundamentals governing their expectations of supply and demand, with one eye open on the indicators that the technical analysts glean from their charts.

On the assumption that global automobile production and sales will slow down in lockstep with the US economy, it is expected that slackening demand will outweigh falling production, as auto manufacturers sit on the side lines employing their stockpiles until they either have to pay the going price for the metals as their stocks are depleted or alternatively enter the market when they consider that the prices are bottoming.

We have no idea which of the two alternatives will be triggered, but after falls of around 50 % in price, some action can reasonably be expected to happen sooner rather than later.

Just because the US and developed countries are to all intents and purposes in a growing recession it does not mean that the vast and increasingly affluent markets of China and India are going to stop buying cars and trucks.

Certainly demand will fall off but current indications are that growth in both countries will only half in the next twelve months to around 5% from highs of 10-11% p.a.

Let us not forget Russia, the more stable oil producers, Brazil and others that have become less and less dependent upon the state of the US economy, all of which adds up in our opinion to a healthy level of auto production.

Even if GM, Ford and some others shackled with outmoded work practices, restrictive employee legislation, and in the current climate, lack of adequate financing, find the going tough, there are Chinese, Indian and some well placed Western manufacturers more than able to meet emerging market growing demand.

Within the last week there has been some pick up in the prices of the three metals, with platinum around $1190 an ounce, still 50% down from its record high of $2290 reached in March.

We do not see platinum rising to more than $1300 – $1400 an ounce over the next twelve months unless a cataclysmic event occurs in South Africa that halts or very seriously affects production.

In the meantime, with some small indications that PGM prices may be firming up it is possible that some auto manufacturers may be dipping their toes into the market.

With gold and silver taking center stage as the current US economic situation looks to be deteriorating further with the dollar continuing on its downward path, there seems little reward in playing the PGM market and its producers.

Despite our very bullish medium to long term stance on gold and silver we should warn our readers that there is are at least two mad mavericks waving their loaded guns at the market.

Like a gambler who has lost all taking one final big bet by playing Russian roulette, Messrs Bernanke and Paulson will undoubtedly make attempts to undermine the gold and silver market in the hope that the flight to the safe haven asset at the expense of the dollar can be reversed. Their attempts may very well be successful in the short term but Mr Market will not be denied.

When this happens look upon it as opportunities to increase your positions in the two metals. We believe that this is racing certainty of a bull market so any dips should be welcomed with open arms.

And don’t forget the producers, there is big money to be made particularly among the junior miners. The sector is only just beginning to recover after taking some heavy hits in the last six months.

Our extreme optimism may be entirely misplaced so we urge you to look closely at the many factors affecting the market and make your own judgement.

Who knows if we have overlooked one or more influences that may have a negative impact?

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Category: Platinum Group Metals

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