Precious metals update

27 Aug 2012 by Jim Fickett.

In inflation-adjusted terms, all four of the precious metals remain well above their long-term average prices (not too surprising given the euro crisis and the US deficit).

There are differences. Gold, the primary monetary metal, is 136% above its 40-year average price. At the other end of the spectrum, platinum, which is currently in oversupply and whose price depends on the somewhat depressed global auto industry, is only 64% above its long-term average.

27 Aug 2012 nominal 27 Aug 2012 real mean 1969-2012 real 27 Aug 2012/mean
Silver 30.72 13.41 6.61 2.03
Gold 1663.60 726.46 307.58 2.36
Palladium 647.00 282.53 144.98 1.95
Platinum 1539.00 672.05 408.86 1.64

Note that while gold, silver and palladium show strong recent run-ups, platinum's price has actually been fairly stable for several years. It is possible that the cost of producing platinum is, and will remain, much higher than it was in the past.

A recent report from the Economist provides some support for the idea that platinum may be permanently more expensive.

Although South Africa contains some of the richest mineral deposits in the world, mining’s contribution to GDP has fallen from a fifth in 1970 to less than 5%. During the recent minerals boom, production actually shrank by 1% a year, whereas it surged by an annual average of 5% in the rest of the world. Output has now dropped to its lowest level for 50 years and the industry is much smaller than it was in 1994, when the ANC first came to power and mining still represented 9% of GDP.

There are many reasons for this, including the country’s shoddy infrastructure and patchy electricity. Eskom, the state-owned utility, has been encouraging mining firms to limit production to avoid power cuts. Many mines, some more than 100 years old, are also proving ever more difficult and expensive to exploit. Mining skills are scarce, productivity stagnant and costs rapidly escalating. The unions are strong and strikes frequent.

But investors are most deterred by the unpredictability of the government’s mining policy. Bemoaning a welter of new regulations brought in during the past decade, Cynthia Carroll, head of Anglo American, one of the world’s largest mining firms and South Africa’s biggest private-sector employer, said that companies were not prepared to make huge long-term capital investments any more, for fear of “arbitrary and unpredictable regulatory change”. She begged the government for stability and clarity in its policy, particularly over the question of nationalisation, which the ANC’s Youth League endorses.

(See also a related post from almost a year ago, Platinum may be reasonably priced, and the Reference page Historical prices of precious metals.)