The Goldrums of June are giving way to a new dawn for platinum group metals, says David Franklin, a market strategist at Sprott Asset Management. While white metal miners face a variety of challenges, there is an increasing demand for platinum and palladium from vehicle manufacturers in the U.S. and China. And supplies of the hard-to-find metal are vanishing day by day. Now is the time to buy into existing stockpiles of the precious metal, Franklin tells The Metals Report.
The Metals Report: David, can you give us your recap on gold's recent performance?
David Franklin: During the first half of the year, gold companies booked large write-downs to assets, which they had purchased earlier in the cycle at inflated values. Then, Bernanke mentioned a potential reduction in stimulus from the Federal Reserve, which prompted U.S. hedge funds to sell large positions in gold. Soros, Paulson and Daniel Loeb each sold a large chunk of their holdings. There was just a huge amount of bad news in the whole precious metals sector and it was all priced in by the end of June.
TMR: Are precious metals in the midst of a true comeback?
DF: We have turned a corner and are now recovering as the market rebalances. The good news is that gold and silver are up more than 20% from their June bottoms. We still have huge demand for physical metal as evidenced by depleting inventories at the COMEX.
TMR: How are the junior gold miners doing?
DF: Look at the GDXJ, which is an index of junior miners: Gold stocks have recovered somewhere north of 30%. The GDX, which is an index of senior miners, has recovered in the neighborhood of 20%. Gold stocks have more than rebounded since the horrible June lows.
TMR: What qualities do you look for when assessing precious metal miners?
DF: First and foremost, I look at the company managers. I put a premium upon an executive's previous success within the industry. That is more important to me than his or her ability as a geologist or as a mine builder. Secondly, I independently assess the merits of the company's deposits, and whether a mine has a good chance of showing a profit. There are so many deposits out there that cannot become profitable. The third item I look at is the firm's access to capital. Can it raise enough money to actually build a mine and bring it into production? Frankly, finding all of these qualities together in one company at the same time is a very rare combination.
TMR: How do platinum group metals fit into the overall precious metals market in terms of industrial demand and other uses?
DF: In dollar terms, PGMs are the smallest of the precious metal markets, and these metals are used differently than gold. For example, gold is a monetary metal and very little of it is used by industry. Most platinum and palladium is consumed by industrial processes, but it is still considered a precious metal.
DF: Both platinum and palladium are used in catalytic converters, which remove carbon dioxide and some of the smog producing gases from internal combustion engines. However, platinum has a higher melting point and can be used in hotter burning engines, like diesel cars. Engines with lower operating temperatures, such as gasoline cars, can use palladium in their converters. Right now, palladium is about half the price of platinum.
TMR: What is the global supply and demand outlook for platinum group metals?
DF: South Africa is a very significant player in gold mining, and an even more significant player in platinum mining. More than 70% of the world's platinum comes out of South Africa. Right now, South Africa is entering its biannual labor negotiations and tensions are very high. The gold and platinum mining companies have offered their workers a 5% increase in wages. Depending on the particular union, the workers are demanding a doubling of wages or a 60% increase—and are threatening to strike. You can imagine how a strike could impact the price of gold, and to a lesser extent the price of platinum. Last year, the platinum price increased by 15% after striking miners were shot and killed in South Africa by government forces.