Eastern Platinum Ltd (ELR)

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ANALYSIS-Platinum leaves gold in the dust as ratio widens

Tue Apr 20, 2010 9:01pm

* Rising platinum-gold ratio suggests recovery taking root

* Better footing for economy rates will rise

* Headwinds for growth remain in high debt, soft labour mkt

By Jan Harvey and Veronica Brown

http://in.reuters.com/article/domesticNews/idINLDE63J1D320100420?rpc=401&feedType=RSS&feedName=domesticNews&rpc=401&sp=true

LONDON, April 20 (Reuters) - The recovery of platinum prices XPT= from multi-year lows hit at the height of global economic panic in 2008 means they are finally approaching pre-crisis levels and, on the face of it, so are the metal's fundamentals.

A scan of price action paints an impressive picture for platinum, used to clean auto emissions and in jewellery. The metal has outperformed bellwether gold to climb 17 percent so far this year to around $1,715 an ounce, versus gold's 4 percent rise XAU= to around $1,140 an ounce.

Fundamental supports for the market include new investment products and signs of recovery for a battered global car sector. At the same time, U.S. real interest rates are rising, raising the prospect of monetary tightening as a headwind for gold.

Platinum's premium over gold hit a 17-month high in early April, fuelled by hopes the recovery may be gaining traction.

The gold/platinum ratio -- how much platinum is needed to buy an ounce of gold -- hit its lowest since October 2008 in early April at 0.66, a level last seen before crisis engulfed the global economy.

Analysts say while some of this rise is due to a climb in investment, the ratio movement suggests real consumer appetite is now in platinum's favour.

"The gold-platinum ratio should be a leading indicator of what is happening in the real economy," said Standard Bank analyst Walter de Wet. "Gold is largely driven by accommodative monetary policy, while platinum is a real economy variable."

Platinum prices hit parity with gold in late 2008 as demand for raw materials tumbled in the throes of economic downturn, sending investors towards bullion as a safe store of value.

Attempts to combat the slump by slashing interest rates also cut the opportunity cost of holding non-interest-bearing gold.

But the picture changed early this year as hopes for a recovery in car demand lifted platinum.

Chinese car sales have been strong so far this year, growing by almost two-thirds last month as buoyant consumer sentiment lifted spending, while other leading car markets, notably the United States, are also recovering from last year's slump.

"A major driver of industrial demand going forward will be restocking by auto manufacturers and growth from emerging markets," said Bradley George, co-portfolio manager at the Investec Global Gold Fund.

REAL USAGE?

While the recovery in car sales is a fairly clear indicator that industrial demand for the metals is set to rise, some analysts question how far real platinum usage is increasing.

The European car market -- whose chiefly diesel-powered vehicles use a higher loading of platinum than palladium -- has lagged growth seen elsewhere, although luxury carmaker Daimler late on Monday reported healthy demand for its cars.

More broadly, clear headwinds still remain for global economic growth, with high debt levels in major economies like the United States, UK, Japan and some euro zone countries still worrying investors, and U.S. labour markets persistently soft.

Bearing that in mind, some suggest the metal's rally and the widening platinum/gold ratio may be just a little premature.

"It may be a mirage -- industrial production figures suggest that there is certainly an improvement in the economic situation, but not as much as the ratio would suggest," said Ross Norman, director of TheBullionDesk.com.

As evidence, he points to strong inflows into the platinum backed exchange-traded fund launched in New York in January.

"The strength in the platinum group metals ETFs has probably overstated the coming together of the ratios to the pre-crisis levels, simply because of their popularity," he said.

In the short term, the gains platinum has already made and the fragility of the recovery are raising some caution towards the metal.

At the same time, gold has rebounded as concerns over charges laid by U.S. regulators against Goldman Sachs and Greek debt lift demand for a haven from volatile markets.

The ratio of the two metals has already inched back up to 0.67. But analysts are confident it will drop once more.

With investment currently making up a disproportionately large proportion of gold demand, any change to the low interest rate environment or to risk appetite may hurt gold. The market is also awaiting further International Monetary Fund gold sales.

This, added to the stronger platinum outlook, is set to lead to a widening differential between the two. The argument is whether it will be platinum's gains or gold's losses that drives this, with the former nosing ahead in analysts' estimations.

"If the ratio were to return to pre-crisis levels of about 0.5, either gold would have to fall to about $850-900, or platinum would have to rise to $2,000," said VM Group analyst Matthew Turner. "At the moment the latter seems more possible."

(Reporting by Veronica Brown and Jan Harvey; Editing by Amanda Cooper)