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LAWRIE WILLIAMS: Pgms stuttering as Gold flat and Silver marks time

We are in a bit of a dilemma in reviewing so-called precious metals at the moment.  Gold is increasingly being driven by U.S. Fed and Government data utterances and releases and is somewhat range-bound at present, silver looks increasingly weak but seems to be holding its ground, while equities are nervous, and over-hyped bitcoin continues on an upwards path again.  Markets are not necessarily logical at the moment, although we see perhaps more logic in the paths platinum group metals (pgms) have been taking of late.  

We have expressed doubt beforehand as to whether platinum group metals should be classified as part of the ‘precious’ metals complex at all.  True they have rarity value but are little used now, or ever, in the same kinds of monetary classifications of gold, in particular, and silver in the past.  Platinum does have a small, but important, role in jewellery manufacture alongside gold and silver, but the market impact of this is relatively minor.  It does raise its head in a monetary context as in the shot-down gimmick of the U.S. minting a $1 trillion platinum coin – apparently as a rather dubious means towards helping alleviate the country’s enormous debt position.  Good media fodder, but probably totally unrealistic.

In our oft-expressed opinion, though, the pgms fall almost wholly into the industrial metals category nowadays – at least the openly traded ones do.  Both platinum and palladium are hugely dependent on motor manufacture and vehicle demand for their prime markets, so should definitely be classified as ‘industrial’ rather than ‘precious’ metals. 

Around 50 years ago legislation started to be passed to limit the internal combustion engine’s exhaust emissions and platinum was discovered to be the most efficient catalytic element to be utilised in achieving lower emission standards.  Platinum at that time suffered limited supply, almost all of which came from South Africa and Russia, with minor production in Canada as a byproduct of that country’s significant nickel mining sector. 

Demand for this relatively rare metal expanded as exhaust emission control legislation spread and became ever more stringent all around the globe.  As a consequence, the platinum price shot up and considerable effort was made to find a cheaper substitute.  The industry ended up focussing on palladium – at that time a fraction of the price of platinum, but with somewhat similar metallurgical characteristics.  Eventually palladium came to replace platinum as the catalytic metal of choice for petrol (gasoline) driven light vehicles, although platinum still retained a place in cleaning diesel engine exhausts. 

With the exceptional growth in the motor vehicle sector right up to the early days of the COVID-19 pandemic, comparatively rare palladium in particular moved into a substantial supply deficit situation and the price soared accordingly, overtaking platinum which had been in something of a supply surplus.  Recently the palladium price had risen to be comfortably more than double that of platinum and talk and action to implement reverse substitution of platinum catalysts to replace palladium ones in petrol engine exhaust emission control began to be at least discussed.

Of course it’s not that simple.  One cannot just replace palladium catalysts with platinum ones.  Huge developments had been made in tweaking the efficiency of palladium catalysts and platinum researchers would have to play catch-up if they were to come up with a suitable substitute.  Further, what would happen to the relative prices of the two metals were platinum to again become the dominant catalytic metal in exhaust control systems?  We suspect that for the moment any reverse substitution will be relatively limited and the metal prices will remain much as they are in relation to one another. But over time we would expect the platinum price to overtake that of palladium again, but that will probably be due to a reduction in the price of the latter and an uptick in the former and may take some years yet.

Meanwhile there is another ‘fly in the ointment’ occurring affecting current demand for both pgm metals.  In this case it is the shortfall in supply of microprocessor chips which is adversely impacting vehicle completion and sales and causing manufacturer volume reductions.  Looking longer term the expansion in electric vehicle sales will impact palladium more than platinum, with the latter, at present, having greater demand in ‘green’ technology like hydrogen fuel cell development and manufacture.  While prices remain in their current balance there will be little incentive for researchers to look at palladium as a platinum substitute – but who knows what the ultra long term will bring?  The pgms, as will silver, thus largely depend on overall economic growth for any price expansions ahead. 

Silver seems to have lost some of its direct connection to gold, but many years of their close relationship is hard to eradicate from the investor psyche.  Its growth potential in the industrial sector has to be positive in strong fields – photovoltaics (solar panels etc.) electronics and the medical sectors come to mind and there is still good demand in jewellery manufacture.  But supply, despite what some commentators aver, seems to remain substantial so we don’t see any huge upwards price pressures here either.  There remains a tendency to follow gold’s lead in the price direction, but there’s as yet no indication of a big gold price boost ahead.  So, for the time being, one does not anticipate any drastic movement up or down for any of the so-deemed precious metals.

12 Oct 2021 | Categories: Silver, US, Platinum, Palladium, Bitcoin, FOMC

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