Dear Reader,
Gold’s grabbing the headlines right now. That’s not surprising given that it’s been hitting new highs every day this week.
But with gold all over the mainstream news, you might want to look elsewhere for a slightly less popular trade just now. This one’s looking a little crowded, and could pull back. You’ll get a better chance to get in…
It’s times like this that it pays to belong to a small investment group like The Zurich Club – where you can get less mainstream ideas. Scanning through their recent research, I came across this far more exciting precious metals play – one that’s still hidden away… one that has a lot higher to go.
Read on for the story…
If there’s anything that represents the biggest cultural shift in China, it’s the giant ring roads that circle Beijing’s ancient walls. At the moment there are five of them, and there’s supposedly another one in the pipeline.
These enormous roads illustrate how much the world’s ‘bicycle kingdom’ has fallen in love with the car. China is no longer about pedal power. It’s all about the horsepower. Or to give you another striking example, when Beijing hosted the 2008 Olympics, car congestion was such a major problem, they created special ‘Olympic lanes’. This was the only way to make sure competitors would reach the venues on time.
As I’m about to show you, this boom in Chinese car ownership is only just in its infancy. And as 150m new cars hit the country’s road in the coming years, it’s one
commodity in particular that could see a mammoth surge in demand.
The price of this precious metal is languishing right now, and the investment herd isn’t yet interested, which makes this the perfect time to buy for the maximum potential gain.
Let me explain...
Chinese car sales could increase five-fold
Despite the recession, rising incomes in third-tier cities like Xi’an and Chengdu have allowed Chinese car sales to surge 21% this year. Measures in the economic stimulus plan to halve the purchase tax on small vehicles and provide incentives for rural residents to replace older models have certainly helped, but this is a long-term trend that is here to stay.
Currently only 29 people out of every thousand own a car in China, whereas in the US it is 765 and in the UK it is 426. However, the country is catching up fast, primarily because cars in China are becoming more widely affordable. Analysts estimate that 40% of urban households in China have the money to run a medium-priced model if car financing is available, while 90% of rural households can manage the cheapest vehicles on the market.
Given this backdrop the rate of ownership is expected to increase fivefold in the next decade to reach 148 cars per 1,000 by 2020. Based on the current Chinese population of 1.3bn this would imply an extra 150m cars for the domestic market, which is almost six times the number of vehicles on the road in the UK.
We must take statistics from China with a pinch of salt, but it is undeniable that a boom in car sales is unfolding. When you build in the population growth the numbers become even more staggering. So how can investors like you and I get a slice of this Chinese car boom?
Well, it’s all about investing in a commodity that every new car needs. And right now the price of this commodity looks extremely attractive indeed...
The precious metal that makes these cars run
While there are differences in the various models of car across the world, they all share one thing in common: they use catalytic converters to reduce harmful emissions. The key component of these converters is the metal catalyst that the fumes are passed over. These are normally made from the world’s rarest precious metal, platinum.
Ten years ago catalytic convertors accounted for less than 30% of the total demand for platinum. However, the rise in the number of cars and the trend in favour of diesel – whose converters require more of the precious metal – have seen the proportion increase to 46%. The remainder is made up of 29% for indus trial uses, 22% for jewellery and 3% for investment.
In total this makes 6.3m ounces, which is up from 2.6m in 1975. Last year was the first time in a decade that the demand for platinum for use in catalytic converters actually fell, but all the evidence points to a quick resumption in the uptrend. As car ownership in China expands and the world economy returns to growth there can be no doubt that this precious metal will become ever more highly prized.
Why supply is failing to meet demand
The other side of the equation is the supply, but rather than rising to meet the demand it is actually falling. In fact global mine production was down 7% in 2008, which was the second largest successive annual decline.
The main reason was because of problems in South Africa, where three quarters of the production originates. These included power failures, the flooding of a major mine and a significant ongoing skills shortage. This restricted new production last year to 6m ounces, which was well below the level of demand.
These problems look set to continue and are likely to be compounded by indus trial action. In August, employees of the world’s second-largest producer, Impala Platinum, rejected a pay rise of between 9.5% and 10%. The South African National Union of Mineworkers threatened an indefinite strike, which has forced the company back to the negotiating table.
Clearly this sort of bargaining power must add to the cost of production and the final selling price. The global economic crisis had a huge impact on the platinum market with the price collapsing from an all-time high of $2,376 per ounce in March 2008 to a low of $774 in October. It has since recovered to around $1,350.
Johnson Matthey(ticker: JMAT), a world leader in this area, forecasts that supply and demand will be more closely matched in 2009 and as a result the price of platinum will be much less volatile. The longer-term fundamentals suggest that this is an ideal time to buy.
Look, we don’t think that the gold bull market is done yet. Not by a long chalk. But we could well see a pull back after the incredible run lately.
Platinum, meanwhile, has a very strong fundamental story behind it… and a long way to get to its all time highs. This idea from the team at The Zurich Club makes a lot of sense – and one of the exchange traded funds from ETF Securities could be a way to play it.
Good investing,
Frank Hemsley
For The Right Side
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