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Platinum in the Fast Lane
by SEAN BRODRICK on JANUARY 8, 2010 AT 8:30 AM

Many investors know their way around gold or crude oil, but not a lot know what they need to know about platinum. And that’s too bad, because it’s becoming easier than ever to invest in platinum, with a third platinum exchange-traded fund about to make its debut in the U.S. That doesn’t mean you should rush out and buy it — there are some pros and cons to this metal, with potential for rich rewards and equally big losses for the unwary.
I’ll tell you about the platinum funds. First, some platinum facts …
All of the platinum ever mined would fill a room measuring less than 25 feet on each side. Moreover, above ground supply of platinum could be expected to last about a year, compared to about 25 years for gold.

The largest known reserves of platinum are found in South Africa, with Russia and Canada also having some of the larger platinum deposits. South Africa accounts for approximately 80% of the world’s platinum supply. Only about six million ounces of platinum are produced by mines every year. That amounts to less than 5% of annual gold production. Platinum is rare.

Like gold and silver, platinum can be used for jewelry. But jewelry demand is now only 20% of yearly platinum demand versus 40% just five years ago. And even if you don’t own platinum jewelry, you may be using this dense, malleable, corrosion-resistant metal every day. That’s because the biggest and growing demand for platinum is in industrial products, especially in catalytic converters for automobiles.

Since more than half the world’s platinum is used in catalytic converters, platinum sees its price rise and fall with demand for new automobiles. When the U.S. auto industry took it on the chin, platinum prices plunged. They’ve since recovered, but are still off their highs.
Now here’s the interesting thing about platinum demand. Global auto sales are coming out of their slump and shifting into higher gear. You saw that Ford’s sales grew 25% in December. But China’s auto sales have passed that of the U.S., and should grow by 44% year over year to 13.5 million vehicles.
Want some more fascinating facts? There are about 900 cars for every 1,000 people in the U.S. But there are only 30 cars per 1,000 people in India, and less than 10 cars per 1,000 people in China. Where do you think car sales will go in India and China? I’d say zoom-zoom! And what will that do to platinum demand for catalytic converters? Zoom-zoom again!
Result: Metals experts at Johnson Matthey expected the platinum market to have a small annual surplus of 140,000 ounces in 2009, but that surplus could go away in 2010.
Where would that take the price of platinum? HSBC has a target of $1,600 an ounce, and my target is $1,700. That’s an 11% move from recent levels.

But it could go higher, perhaps back to its 2008 high around $2,300 an ounce, especially since it’s such a thin market. There isn’t a lot of platinum around. Once the bulls — or the bears — get running, they’re hard to stop.
So the outlook for platinum is pretty darned bullish. And that brings us to the platinum funds …