Platinum set to hit parity with gold, but comeback may be a blip

Mon Jan 14, 2013 3:38am EST

* Platinum's discount to gold hits narrowest in nine months

* Shaky euro zone economy may limit short-term gains in platinum

By Rujun Shen

SINGAPORE, Jan 14 (Reuters) - Platinum is set to reach parity with gold after rallies in recent weeks sent the metal's discount to gold to its narrowest in nine months, but it may be too early to declare platinum's comeback since economic recovery remains weak, especially in Europe.

The spread between gold and platinum narrowed to $31.30 an ounce, its smallest since last April, after platinum staged its biggest two-week rise in about four months on growing expectations of global economic recovery. On average, platinum has stood at a $190 an ounce premium over gold since 1985.

As more than half of platinum is used in industrial applications, the sluggish global economy had dulled the shine of the metal, despite its scarcity and a market deficit caused by supply constraint from top producer South Africa.

That picture may shift this year to platinum's favour, as hopes grow that Europe may stabilise and the global economy embark on a steady path to recovery, lifting outlook for metals used in industries.

"You have a metal which is more expensive to produce than gold, whose supply is not growing and whose market is expected to be in a deficit, such metal should trade at a premium to gold," said Dominic Schnider, an analyst at UBS Wealth Management in Singapore.

But he cautioned that a return to a big premium in platinum would be unrealistic.

"We are going to make it to the parity and a possible $50 premium in platinum. But the global economy is still on a weak footing and it will be too early to call a $100 premium."

The average production cost of platinum was about $1,600 an ounce, while the production cost of gold stood at $1,200 an ounce, he added.

Spot gold traded at $1,668.24 an ounce by 0827 GMT, down about 0.4 percent so far this year after posting gains for the twelfth year in 2012.

Spot platinum traded at $1,635, up more than 6 percent so far this year and leading the performance of the precious metals complex.

Some analysts are less sanguine, citing the protracted dismal economic conditions in Europe.

"I worry we might see a repeat of what happened last March," said Nick Trevethan, senior commodity strategist at ANZ in Singapore, referring to a short period of platinum's premium to gold in early 2012.

"In order for platinum to hold a premium over gold, we need to see a little more strength in demand...especially from Europe. The supply side risk is there, but it hasn't materialised sufficiently to maintain platinum at its traditional premium to gold."

About two thirds of Europe's platinum demand in 2011 went to the auto sector. Car sales in the region are expected to further decline in 2013, as the euro zone debt crisis and government austerity measures sap consumer demand.

The high net longs in U.S. platinum futures and options may pose a threat to a sustained platinum rally, as the speculators loaded with long positions may sell off to take profit in the short run, analysts and traders said.

Net longs in U.S. platinum futures and options bounced from a one-month low to 28,939 lots in the week ended Jan 8, down 18 percent from an October peak of 35,145 lots, but up 59 percent from the 2012 average. (Editing by Tom Hogue)

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