A little over an hour’s drive west of the South African town where my wife grew up is one of the most valuable pieces of real estate on the planet.
The drive along the N4 highway going west is glorious.
Under the most beautiful blue skies on the planet, you pass towns with charming South African names such as Modderspruit, Elandsdrift and Mooinooi (“pretty girl”). You dodge cattle and goats grazing along the verge. You dodge minibus taxis, too.
Take a random right turn, and you’re almost certain to end up somewhere that looks like this:
That’s the Kroondal mine. It sits on the Platinum Complex, which holds one of the great untapped reserves of this industrial metal. So, it’s no surprise this mine is one of the world’s top producers.
And thanks to developments on the other side of the world from those African blue skies … so dear to my heart … that platinum is set to make smart investors very rich this year.
Here’s why you’ll want to “send” some of your money to Kroondal, even if you can’t make it yourself.
A Perfect Storm for Platinum
Even though it’s rarer than gold, platinum is primarily a commodity metal.
In catalytic converters, it helps turn carbon monoxide and greenhouse gases into carbon dioxide and water.
It’s also indispensable in the chemical industry, where it’s a catalyst for products essential to consumer, agriculture and defense industries, such as nitric acid.
As a commodity metal, platinum benefits when the economy grows. Increasing demand pushes up the metal’s price, which makes companies that produce it more valuable.
That’s why, with a massive wave of government stimulus and consumer savings about to wash over the economy, we can safely be bullish on platinum.
But there are three other tailwinds behind the whitish-gray metal.
Tailwind No. 1: platinum’s price relative to palladium, the other metal used in catalytic converters.
The latter’s price (the blue line in the chart) has increased much faster than platinum (the red line), leading manufacturers to substitute the cheaper metal, boosting demand for it:
Tailwind No. 2: inflation.
I’ve written and spoken a lot recently about the negative implications of inflation for stock prices, especially growth/tech companies.
I’ve also pointed out that inflation can be good for some stocks because it boosts their nominal earnings. But if you really want to see outsized gains in an inflationary environment, look to commodities such as platinum.
The chart below shows “inflation beta,” the relationship between asset prices and inflation over the last 50 years. The higher the beta, the more boost an asset gets when prices are rising.
At the very top of the list is commodities. Overall, commodity returns are lower than stocks, real estate investment trusts and some bonds. But in periods of rising inflation, commodities blow every asset class except gold away:
As one of the world’s central industrial commodities, we can expect platinum prices to rise rapidly as inflation picks up, as it surely will over the next year or so.
Tailwind No. 3: platinum’s potential to outperform electric vehicle (EV) batteries made with cobalt.
Lion Battery Technologies, a joint venture between competitors Platinum Group Metals (NYSE: PLG) and Anglo American Platinum (OTC: ANGPY), is developing platinum-based batteries. Current estimates say lithium batteries made with platinum would be 61% lighter and 53% cheaper per kilowatt hour than those made with cobalt.
But there’s more to it.
Cobalt, which Elon Musk insists he will use in his Tesla batteries, is both extremely scarce and sourced in conflict zones — often with child labor.
Those are two powerful incentives to develop platinum-based batteries for EV use, which could give the metal a great long-term boost.
How to Play It
An easy way to profit from rising platinum prices is via the Aberdeen Standard Physical Platinum Shares ETF (NYSE: PPLT). This exchange-traded fund (ETF) is backed by physical platinum held in a secure vault in London.
PPLT has $1.5 billion under management and a three-month average daily trading volume of 248,597 shares. That gives it plenty of liquidity, so you should be able to get in and out of the ticker at optimal prices.
Of course, you can increase your gains from any metal by investing in miners. That allows you to benefit from the leveraging effects inherent in mining stocks, which tend to appreciate faster than the underlying metal.
Here’s how the price of one platinum miner (red line) did in the last big run-up in the platinum price (from 2005 to 2008):
If that sort of action is appealing to you, be sure to check out my Profit Switch service … where Clint Lee and I are currently researching potential platinum-sector additions to the model portfolio.
Editor, The Bauman Letter