South Africa is Gambling Big on Platinum

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There's a number of nations across the world in dire need of an economic silver bullet, ranging from Afghanistan and their sole reliance on opium to Haiti facing 50% unemployment.  A true bullet made of silver, or more accurately platinum, may be on the horizon for South Africa.  A nation facing a bevy of problems, South Africa has seen their mining output fall by double-digit percentages from 2014 to today, resulting in their GDP growing by just a hair over one percent after enjoying over 10% growth per year during the commodity boom.  South Africa struggles from the fluctuating prices of gold and diamonds, but above all from the drop in platinum.  No other nation produces as much platinum as South Africa -- in fact, all other nations combined make up less than half the global supply.  That's why the South African government has put forward plans to popularize platinum as a reserve currency, a welcome stretch of news for platinum investors who haven't had any good news in far too long.

Propping Up Platinum

While gold and silver get the main billing on the precious metals market, platinum has a number of economists in its corner.  The scarcity of platinum compared with the relative abundance of gold makes the former metal a more valuable commodity when currency rates fall, as all the platinum that has ever been mined in all of human history fills up an area of just 25 cubic feet (or about the size of a large refrigerator).  The higher relative density of platinum, furthermore, at about 11% more dense than gold overall, makes the metal particularly valuable in pressurized environments like spacecraft heat reflectors or electrodes, while gold cannot take even so much as a fingernail without bending under the impact.  Demand for platinum hasn't trickled out at the end of the commodity boom, furthermore, with computer hard drives powering the market.  Platinum jewelry accounts for only about a quarter of total platinum demand, compared with gold demand sitting at about fifty percent for jewelry.  If these factors make platinum such a strong reserve currency, however, why haven't other nations brought in platinum as the backing for their money?  In a word, because of popularity.  The demand for gold is so high, as evidenced by China's mass importation, because everyone wants to keep up with their neighbors.  South Africa wants and needs to change this particular practice in order to give their mining industry a shot in the arm.

Metal Makers

The South African government has a functional democracy but only one party, the African National Congress, controls the majority of parliamentary policy.  The ANC wins elections thanks to a populist message and strong historical ties to the legacy of Nelson Mandela, but since the death of the nation's figurehead leader the ANC has been mired in scandal and corruption.  The party received only 62% of the vote in the 2014 recall elections, leading to a minority Democratic Alliance getting a foot in the door for their politics in the first time in decades.  The DA has pushed platinum mining and export as a national priority, leading to their support of labor strikes that sent prices surging in late 2014 and 2015.  The DA has a much more ambitious scheme up their sleeves, however, in order to get the nation's mines (of which 50% are currently unprofitable) to provide fellow BRICS nations with platinum.  The DA signed an agreement with platinum producers like Glencore and Lonmin to provide platinum at below the spot price (currently just under $1000 per ounce, a six-year low) to fellow BRICS nations.  The appeal for South Africa is straightforward, ratcheting up demand for their metal, while it's a plum opportunity for other BRIC nations to bolster ailing currencies.  By purchasing platinum at lower rates, nations with shaky currencies (most notably the ruble) will be able to provide valuable precious metal to their central banks and stabilize currencies.  The deal gives Brazil a chance at avoiding recession by keeping the Brazillian dollar from falling at its historic highs.  By far the biggest currency benefactor of the deal would be China, who has voluntarily chosen to debase the yuan rather than bring in gold for a currency boost. 

Realistic or Pipe Dream?

It's all well and good for South Africa to come up with an ambitious plan for platinum, but it's another thing to put it into practice.  Some BRICS nations may not want to link their economy to platinum when South Africa enjoys a near-monopoly on the metal.  Since Russia is a distant second in platinum production, furthermore, they can implement the practice without buying South African metal and affecting the commodity market.  Still others fear that the use of platinum would destabilize gold, which is already on the ropes after a downright brutal 2015 calendar year.  Yet South Africa's plan looks cautiously solid: it offers a steady customer base for their mining sector, increases their trade output, and offers a financial solution for BRICS nations that are struggling to control their dollars, rubles, and rupees.

  • The Takeaway: whether the South African plan succeeds wildly or only gains a bit of lukewarm support, platinum will benefit from the exchange.  It's been a long while since there's been any good news about platinum, making it an excellent value holding in your portfolio.  Invest in platinum commodities with an outlook of steady growth over the next twelve months, when the South African policy will hit the ground.  The growth will likely not be massive, meaning that investors should look for platinum as a longer-term option than many commodities.  Don't sell off within the next six months to reap the best value.
  • The price of platinum often has an inverse relationship with the South African economy.  As the South African GDP continues to disappoint, there will be less capital available to spend on platinum mines, driving the prices upward.  There's few factors that will drive the metal's price down, making it a smart buy at the current asking price.

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