Platinum hasn’t been in the news much lately, yet global demand has hit record levels amid dwindling supply. With its price now sitting below its cost of production, pointing to further supply shortages, is there a case for buying platinum?

There is currently a record demand for platinum with a record of 8.4 million ounces needed this year. Just over three million ounces of that is needed by the car industry for catalytic converters and a further 2.75 million needed for jewellery. Demand has been steadily growing since 2009. Yet the platinum price has been steadily falling since mid-2011, when it hovered briefly around the $2,000 mark.

You may be excused for thinking that there has been an increase in supply but that isn’t the case. World platinum mine supply was fairly constant from 2007 to 2011, ranging between 5.9 million and 6.6 million ounces. But in 2012, that fell to 5.7 million and it hasn’t rebounded.

Around 75% of global platinum supply comes from South Africa, where production has been falling since 2011. Add in the cost of building the mine and compound deficits over time, platinum mining becomes a very expensive loss-making exercise. A mine can only lose money for so long before it gets shut down. At least four have closed this year already and now only higher-grade, more profitable rock is being mined pointing to further supply falls in the future.

South African platinum production therefore looks fragile as does the other main producer, Russia, where production has also fallen. In addition, the ratio of gold to platinum, low by historic standards is almost 1:1 just now i.e platinum costs about the same as gold. It’s not unusual for platinum to cost twice as much as gold.

Nevertheless, according to reports, the demand-supply deficit will grow as the above-ground stock will run out and the platinum price will rocket. So why has the price been falling in the face of such bullish fundamentals?

Historically, platinum tends to follow the same trend as the CRB index, following the same direction almost all of the time. The CRB is about 75% weighted to energy, grains, meats and softs, things that have nothing to do with platinum. Yet, where it goes, platinum goes and that has been the case for years. Commodities are in a bear market i.e. trending down and nobody knows when this will end but there is quite clearly a set-up for a supply squeeze and higher prices. The question is when? Platinum’s time will almost certainly come again, possibly sooner rather than later. Its future’s looking bright…