Technical analysts say platinum is in oversold territory. Now is the time to buy.

I think they are wrong.

Don’t listen to a word they say. You’d be better off taking investment advice from the horoscope page of the Daily Mail.

I have always been a bit suspicious of chartists and their theories… particularly Elliott Wave theory.

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During the latter half of 2004 and throughout 2005 I worked with one of the UK’s “top” Elliott Wave analysts. For diplomacy’s sake, I shall not mention his name.

His highly-honed charting skills ensured he was short of the Dow all the way through one of the largest bull runs of recent times. He lost a fortune.

After this experience, I learned never to trust a man with a graph.

So, with the platinum price hitting a 6-month low and men with graphs banging their bullish drums, let’s have a look at why now is the wrong time to buy into platinum.

People are not buying cars

The main use of platinum is in catalytic converters. This accounted for 79% of demand in Europe last year and 86% of demand in North America.

The fortunes of platinum are intrinsically linked with the car cycle. At the moment, the sector is in a significant downturn… and the crash will create quite a mess.

News coming out of the auto industry is dire. It will probably get worse.

In July, US auto sales slid 13.2%… This marked the ninth-consecutive month of falling sales in the US market. This is first time this has happened since the last US recession 7 years ago. It was the worst monthly result since April 1992.

The situation is slightly better in Europe, but sales still fell 8% in July. BMW are also on record as saying that 2009 will not be much better.

So, with the US car market in freefall and the European car business in decline, will Asian demand keep the platinum price high?

No. That is unlikely.

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China's stockpile of unsold new vehicles rose 50% to a four-year high in the first half of this year. Foreign carmakers have invested in so much capacity in China that supply now far exceeds demand. It is likely that these piles of unsold vehicles will continue to grow.



Supply on the rise

The world’s biggest platinum producer is South Africa. The country’s energy crisis has hit production and this has been supporting the price.

But this may be about to change.

An investigation by Credit Suisse Standard Securities analyst David Davis shows a substantial rise in mine supply over the next few years, despite the country’s energy crunch.

This is yet another negative for the platinum price.

“For now, we believe the South African platinum industry is expanding too rapidly, which will likely put platinum and rhodium into a surplus over the next five years and, as a consequence, negatively impact precious metal prices and companies’ earnings.”

Davis thinks the platinum market will move into surplus between 2010 and 2014.

Because of this he is predicting a further 30% fall in the platinum price.

There are other bearish factors to consider.

Platinum jewellery has got more expensive over the last year. This will hit sales. The high price is also boosting recycling, with stores that buy platinum jewellery popping up all over places like Japan.

The final nail in the prospects for platinum came at the end of July.

Nissan said that it had developed a platinum catalyst that uses half the precious metals of existing technology. It can only be used in cars with a petrol engine, but it will damage demand further if this new technology is rolled out.

So, looking at the fundamentals of the platinum market, we are in a perfect storm. Demand is plunging and supply is set to rise.

Whatever the men with graphs say, don’t buy platinum just yet. It could be a very long time before this market turns.

There are significantly better profit opportunities elsewhere in the commodities sector. To discover what they are click here.

Regards

Garry White
Editor
Smart Commodities UK

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