The Platinum Group Metal With Very Interesting Fundamentals
Introduction
While gold and it’s very attractive little sister silver have attracted
the attention of some investors of late, there is a metal that is far,
far rarer and has fundamentals that merit investment consideration.
Some consider it the ultimate symbol of wealth—above and beyond gold,
silver or platinum—because of its price and very significant rarity.
The metal in question is rhodium. Rhodium is only an infant compared to
the ancient monetary metals of gold and silver. It was discovered
along with palladium by British chemist and physicist William Wollaston
in 1803. Together with platinum and palladium, rhodium belongs to the
platinum group metals (PGM). Besides being a key component in the world
automobile industry, some of rhodium’s other principal uses are in
glass making and as a finish for mirrors and jewellery, in electrical
connections and in aircraft turbine engines.
More recently, rhodium has been used for prestigious honours, or to
symbolize wealth, when silver, gold, or platinum are deemed
insufficient. Interestingly, the Guinness Book of World Records gave
Paul McCartney a rhodium-plated disc for being history's all-time best
selling recording artist and songwriter in 1979.
Price Performance
Rhodium’s price performance has been very volatile in recent years (see
chart above and below). Its average price in 2003 was some $530/oz.
Supply demand deficits led to a massive move up in price until 2008
when it briefly reached just over $10,000/oz.
Rhodium’s primary use is in catalytic converters in automobiles and
with the sharp decline of the global automobile industry, the metal
fell very sharply in price. It fell by more than 90% and today rhodium
is trading at less than $1,600/oz.
Importantly, the average nominal price of rhodium over the last 40
years is some $1,500/oz which means that rhodium costs today not much
more than its average price over the last 40 years (see chart below).
And this despite a huge amount of rhodium having been used in industry
and consumed during that period.
Supply Demand Fundamentals
Annual world production of rhodium is extremely small. Johnson Matthey
estimated that rhodium supply in 2007 was 696,000 troy ounces and fell
to 574,000 troy ounces (nearly 22 tonnes) in 2008. CPM, the respected
precious metals consulting firm expect rhodium supply to be down 3.1%
from last year. In comparison, the world production of gold has been
around 2,500 tonnes per annum in recent years. Thus there is only
roughly 1/100th the amount of rhodium produced annually as there is
gold (rhodium’s annual production is some 1% of gold’s) and yet the
price of rhodium is only some 50% more than gold (some $1,600/oz versus
some $940/oz for gold).
Supply shortages contributed to rhodium price increases in recent
years. This came about due to the massive consumption and demand by the
automobile industry in the US, Europe and western world while supply
remained anaemic at best. While demand for automobiles has fallen
sharply in recent months, the world will need internal combustion
engines for the foreseeable future. Catalytic converters require
rhodium in order to reduce harmful emissions into the atmosphere.
According to the International Herald Tribune, rhodium is expected to
keep outpacing other precious metals in price as its need in diesel and
non-diesel catalytic converters continues. Europe in particular has a
high demand for rhodium, as 60 percent of all its automobiles are
diesel-powered. Indeed, governments internationally are demanding
stricter emissions standards in order to combat climate change. This
should result in higher prices due to this demand.
The US automobile industry alone, was using more than half the world’s
annual new supply of rhodium prior to the recent sharp fall in car
sales. The growing importance of automobile industries in the large
emerging markets such as Brazil, India, China and other Asia and Middle
Eastern countries will likely soon become an important driving force in
rhodium consumption and demand.
Resource Nationalism and Industrial Unrest Creates Supply Risk
With 82% of world rhodium supply coming from South Africa and 14% from
Russia, resource nationalism could become an issue. Russia has been
increasingly flexing its muscles on the world stage and has been using
its gas reserves as geopolitical leverage. The Russians temporarily
stopped palladium shipments in 2001 resulting in palladium surging in
value.
South Africa has recently seen a change of government and there is a
shift to the left in South African politics. The powerful mining trade
unions are becoming increasingly militant and there have been calls for
national strikes and nationalisation of mines. Not to mention the not
insignificant matter of South Africa’s national electricity
infrastructure being extremely poor. This has led to power outages and
rationing of electricity and analysts warn of continuing significant
risks to mine production from these power issues.
Resource nationalism, protectionism and the threat of nationalisation
could lead to export duties and export controls being introduced and
thus the supply of rhodium could be greatly hampered.
Extremely Rare Metal in a World of Dwindling Finite Resources
Scientists have acknowledged the reality that the world's finite
natural resources, including its precious metals, are being used up at
an unprecedented rate. The respected New Scientist has reported on it,
especially in its 'Earth Natural Wealth: An Audit' report. The Wall
Street Journal has also reported ( 'A Metal Scare to Rival the Oil
Scare' ) how man's voracious demand for the earth's natural resources
may lead to us 'running out' of some of them: "Scientists who have
tried to estimate how long the world's mineral supply can meet global
demand have made some gloomy predictions."
This is especially the case with the unprecedented elevation of
billions of people in BRIC and other emerging economies moving from
'peasant class' to middle class in one of the greatest social and
economic transformations the world has ever seen. While talk of
“running out” of metals is hyperbole as there will always be recycling
and limited production, the fall in the global production of rhodium
should lead to higher prices.
In the same way that the phenomenon of peak oil has been recognised in
recent years so too will the reality of peak metals and peak platinum
group metals be realised in the coming years. This should lead to the
price of the earth's precious finite metals rising to higher prices,
possibly much higher.
Investing in Rhodium
Before investing in rhodium, people should realise that rhodium prices
are quite illiquid due to the very small size of the market. . It is
inadvisable to actively trade rhodium as its price movements are
volatile. Thus a buy and decide to take profits at a pre determined
level and or a buy and hold strategy would be advisable. Larger orders
need to be placed over a period of days and weeks in order not to move
the market and ensure a good average price.
Rhodium is a non exchange traded commodity and because it does not
trade on the commodity exchanges it cannot be bought on margin like
other commodities. Thus it cannot be bought using futures, exchange
traded funds, contracts for differences (CFD’s), spread betting or
other derivatives. Rather, investors must opt for the far more
conservative and safer route of owning the actual physical metal itself
rather than paper derivatives. Unknown to most, investors can buy
rhodium in metal form from specialist bullion dealers and store it in
depositories internationally.
Summary
Neither Wall Street nor the investment public is aware of rhodium and
only a tiny handful of investors and institutions internationally have
this extremely rare metal on their radar. Speculators have not bought
rhodium and indeed most investors and speculators have not even heard
of rhodium.
Rhodium is a hard tangible asset that has favourable supply demand
fundamentals. Investors who own it stored in international vaults are
not exposed to the current elevated systemic and systematic risk.
Unlike companies, banks and governments, rhodium cannot become
insolvent.
Rhodium is finite and the rarest of precious metals. In a finite planet
with rapidly growing populations internationally and money printing and
currency debasement on a scale not seen in modern times, rhodium is
likely to at least preserve value in the coming years.
Thus, rhodium merits an allocation within the precious metals allocation of a properly diversified portfolio.
