Precious metals have been very popular among investors for years. It is widely believed that they are a much safer form of capital storage than currencies because they cannot be increased in circulation and have physical uses. Moreover, due to their high volume value, they can be stored privately, which is impossible for raw materials such as oil, natural gas or popular plants.
Of course, the most popular metal of this type is gold. However, platinum seems to be an equally interesting investment asset, it is highly volatile and is often considered undervalued. The text will present the most important financial instruments and derivatives enabling trading on this metal, analyze its past rate and explain what it is characterized by and what its applications are.
Platinum – basic information
Platinum is a precious metal characterized by a silver or white color. It was discovered only in 1735 in Colombia. It has properties such as good electrical conductivity, high resistance and plasticity.
Moreover, the stocks of this raw material are fifteen times less than gold. It is mainly used for the production of catalysts for diesel engines. It also has significant applications in the jewelery and glass industries.
The platinum deposits are concentrated mainly in South Africa, where as much as 87% of global reserves are located. It is also mined in Russia and Zimbabwe. Its price is quoted in US dollars per ounce. Now let’s follow the course of this metal over the years.
Historical platinum listing
The first significant boom on the platinum market took place in 1977-1980. Then its price increased from around $ 150 to $ 960 an ounce. After reaching this peak, the Bessa prevailed, which lasted until June 1982, when the minimum value of the exchange rate was USD 249.40. Then the market of this commodity was in the consolidation phase for quite a long time, the zone of which was marked by the levels of 250 and 600 $.
It was only in 2003 that prices managed to break the upper limit and stay above it, which resulted in a very strong upward trend. It was also then that for the first time a disproportion appeared between the prices of gold and platinum, they were similar before, and during this boom, the second raw material became much more expensive than its more popular competitor among noble metals.
It ended in March 2008, when the highest historical peak was reached. It was at $ 2,299 an ounce. Back then, the price disproportion between these metals was the highest, reaching over $ 1,300 in favor of platinum.
The market then made a sharp correction. It lasted 7 months and its scope was surprising. The price of this commodity fell USD 733.10 at the end of October 2008. The last upward movement was generated in the following years. The price of platinum peaked at $ 1918.50 an ounce in August 2011. Since then, however, the market has been on a downtrend, with a low of only $ 565.60 on March 16 this year.
However, in the last dozen or so days the rate managed to recover from a strong cut and is currently around $ 744 an ounce. Several significant resistance levels have developed over the past years which may be a difficult obstacle to a potential uplift. They take the values 865; 900; 950 and 1000-1020 USD. Interestingly, in 2015 the price of gold managed to surpass platinum and since then the disproportion has widened, currently it is over 900 dollars.
Let us now explain what factors influence the platinum price.
Factors influencing the platinum price
The first important factor is demand. about 95% of the demand for platinum comes from the automotive, jewelery and industry sectors, the remaining 5% is from investments in this metal. Thus, the speculative impact on its price is much lower than that of gold, here the key is whether the production of diesel vehicles, jewelry and optical fibers increases or decreases.
The second very important factor is the political situation in the mining countries. Of course, South Africa has the greatest influence. In this country, miners regularly threaten to strike if they do not receive pay rises. When this happens, the entire platinum production chain comes to a halt.
On the other hand, when everything works as it should, the stocks increase, and the demand does not increase, the price of this metal becomes cheaper, and then mining in some mines is no longer profitable, so they are closed, miners are left without work, and consequently the price increases again.
Now let’s move on to ways to invest in platinum.
Investing in platinum with futures
First, a short explanation – futures contracts are a bilateral agreement to buy / sell a specific underlying asset, in this case platinum, for a strictly defined price on a given date. They are standardized instruments, and they are traded on individual exchanges, which also means predetermined underlying instruments, execution dates and contract sizes.
As for the second and third points, in the case of the above-described precious metal, they expire monthly and are contained in 50 ounces, so a lot of capital is required. This is because they are traded on a centralized, open market and the broker or brokerage house is only an intermediary.
Of course, we don’t have to hold the contract until it expires. We can sell it at the current market price if there is sufficient liquidity in the market. In the event that there is no investor willing to buy it back, the position is closed at expiry at a predetermined price.
The futures market is intended for experienced investors and is speculative in nature. Additionally, it has a leverage of 1:10.
Options are the second way to invest in the precious metal platinum. Options are an instrument that gives their buyer the right to perform a specific operation. Their characteristic feature is that they can use it, but they do not have to, while the other party to the transaction, i.e. its writer, is already obliged to fulfill the option.
The conditions are determined by the exchange and in the case of platinum, they are identical to futures contracts, i.e. they expire monthly and are concluded for 50 ounces and their strike price is strictly defined. There are two types of options – buy and sell. It should also be added that they also allow the use of financial leverage.
So far this market is very similar to the futures market, what’s the difference? In the case of options, we additionally pay an option premium, which is basically the cost of purchasing this instrument. However, as mentioned above, there is no obligation to do so. So, if the price of the platinum goes the other way than expected, we don’t need to activate this security until it expires and we only bear the cost of the premium.
Of course, they can be made at any time before that date. So the risk of loss in this case is known at the beginning of the trade and the potential profit is practically unlimited.
Trading platinum through CFDs
CFDs are the easiest to use and arguably the most popular way to invest in commodities. Their name comes from the English language and is an abbreviation of Contracts for Difference, i.e. contracts for differences. The CFD market is over-the-counter, which means that the transaction is between an investor and a broker and not in the real market.
The CFD contract mimics the movement of the price of the underlying asset, which in this case is platinum. After opening a buy position, when the price of the underlying instrument goes up, we make money on its rise, and the selling side loses, and vice versa. We do not acquire the asset physically, we only speculate about a change in its price in the future. As in the case of futures, on the CFD market we can place long and short orders, and the financial leverage for precious metals in Poland is 1:10.
However, their advantage is the other two issues, i.e. the expiry date and the size of the contract. The deadline does not apply, so you can close your position at any time as long as the market is open and it is lightning fast as the broker undertakes to pay the difference in any situation after placing the order.
What’s more, in this case, we can adjust the size of the contract ourselves to the capital and risk management strategy , they are not standardized, so you do not need large funds to start investing on them. In addition, virtually every broker offers platinum CFDs, so there are no problems with their availability.
Therefore, it is probably the easiest, fastest and cheapest form of bullet speculation in terms of commissions and spreads.
Let’s explain what the investment in physical platinum looks like.
Buying physical platinum – how to recognize it
People interested in investing their capital in platinum without the help of securities can buy it physically in the form of bars or coins, but it is not particularly profitable. First, in such a situation, a tax of 23% is charged, so the transaction will pay off longer.
Secondly, platinum is not easily available and it is often the gold that is targeted by fraudsters. It is sometimes counterfeited (including the certificate of sample), most often replaced in bars with silver, less often with white gold. However, there is a home way to spot a counterfeit, this is called a magnet test. Unlike the precious metals mentioned above, platinum is magnetic, so it will react when it comes close to it. If you are still unsure, seek help from a specialist.
Thirdly, selling it physically will be a more difficult task and will take longer than it is for a futures, CFD or option order, so making a profit is a much more complicated process.
Platinum – prices better than gold, but is it worth it?
Investing in platinum, due to the high volatility, the variety of instruments offering to speculate on it and the potential of this market due to the limited resources of the raw material, seems to be a great way to generate large profits.
However, in this case, one should also take into account the increased level of risk taken. This is due to the fact that the future of this raw material is quite unclear. On the one hand, the shortage of its stocks should increase the price in the long term and increase the investment potential of this precious metal. On the other hand, its most important application is the automotive industry, and in the current collapse of the financial markets, the demand for vehicles with internal combustion engines will decrease, or at least this is what experts expect.
So, due to the characteristics of this metal and its high costs, CFDs are considered the best form of investing in it. What’s more, they have the lowest fees of all three instruments, the fastest execution, reliable market liquidity, do not require a large deposit to conclude a transaction, making them available to virtually every trader.
So, contracts for difference are definitely a good form of investing in platinum, especially beginner traders should focus on them.