Is the platinum price undervalued and a buy at current levels?

The platinum price has faced an arduous battle in 2023, witnessing a decline of approximately 15% year to date (as of June 28th, 2023). The inverted US 2- and 10-year yield curve, suggestive of an economic downturn, along with slower than anticipated economic growth in China, has cast a shadow on the demand sentiment for this metal, which heavily relies on the industrial and motor industry.

But has the market underestimated the value of platinum compared to the demand and supply expectations? This is particularly important when we consider that experts expect that platinum will be in high demand and in short supply throughout 2023.

The World Platinum Investment Council (WPIC) predicts that there will be a 77% increase in the platinum deficit for 2023 compared to the previous year. Their forecasts suggest that there will be a higher demand for platinum from investors, car manufacturers, and industries, while the supply of platinum may be constrained.

Some of the key takeaways from the WPIC’s most recent industry report (released 15 May 2023) are as follows:

• Strong investment demand: The forecast for investment demand in platinum is expected to be significantly higher in 2023 compared to the previous year.
• Record industrial demand: Industrial demand for platinum is anticipated to reach its highest level ever, with a 17% growth compared to the previous year. This increase is driven by expansions in the glass industry in China and increased chemical demand.
• Strong platinum automotive demand: Despite a weak macro outlook, platinum automotive demand is projected to grow by 12% in 2023. This growth is attributed to higher vehicle production, increased platinum usage per vehicle, and the substitution of platinum for palladium in gasoline after-treatment systems.
• Constrained supply: The overall supply of platinum continues to face difficulties, with a decline in refined mine production in the first quarter of 2023. Supply reductions from South Africa (primary producer) are offsetting gains in other regions. The ongoing electricity shortages in South Africa add uncertainties to the supply of platinum from the country. Recycling supply is also expected to decrease due to reduced volumes of end-of-life vehicles and regulatory restrictions on autocatalyst theft.
• Increased substitution of palladium: The substitution of palladium with platinum in gasoline after-treatment systems is expected to contribute to the growth in platinum automotive demand. This substitution is likely driven by factors such as cost considerations and availability.

In summary

The platinum market has experienced a decline in price in 2023 due to concerns about economic downturn and slower growth in China.

However, demand for platinum from investors, car manufacturers, and industries are expected to remain robust. The substitution of palladium with platinum in gasoline after-treatment systems is also expected to contribute to the growth in platinum automotive demand.

The supply of platinum has been inhibited with declines in mine production and uncertainties in South Africa's electricity availability.

The increased demand is expected to outpace supply, furthering the platinum deficit.

Overall, the market may be underestimating the value of platinum compared to what the expected demand and supply dynamics are.

Platinum – technical view

While platinum has been in a short to medium term decline, the longer-term trend for the commodity remains sideways. The sideways trend is considered as we see the price having whipsawed through the 200-day simple moving average (blue line) (200MA).

The price is currently testing support at the 905 level whilst trading in oversold territory. Traders looking for long entry might prefer to see a reversal off this level accompanied by a move out of oversold territory, before targeting a move back towards initial resistance considered at the 980 level. In this scenario, a close below the reversal low might be used as a stop loss indication for the trade.

Should the 905 level not hold, and instead we see a price close below, a move towards 875 might be expected. Traders might then hope to see a bullish price reversal for long entry off this level, before targeting a move back towards the upper 980 mark.