Industrial Metals Now an Advantageous Investment?
Just the other day, I was talking to a friend of mine who happens to be a big investor in precious metals. Naturally, with the sell-off that some of the precious metals markets have experienced over the past few months, he asked me: is now the right time for an investment opportunity in this sector?
When it comes to assessing the precious metals markets, one of the important determinants I look to is the technical situation, because it will indicate the flow of funds.
I also told him that it’s a good idea to adjust one’s portfolio of precious metals based on both the fundamentals and technicals of each commodity.
For example, I reminded him of the article I wrote a couple of months ago, “Are You Missing a Great Investment Opportunity in Precious Metals?,” in which I stated that platinum appears to be offering an attractive investment opportunity.
While my friend loves gold, only approximately 10% of the precious metal’s supply is used for industrial purposes. However, somewhere between 60% and 70% of platinum demand comes from industrial use. When creating a model of price for precious metals to determine whether or not there is an investment opportunity, it’s far easier when the commodity is being used for industrial purposes.
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The reason for that is if a commodity is being bought to simply sit idle and not be used up, there is no way to determine future supply and demand. Since buyers don’t need to purchase this type of commodity, this can cause demand to increase or decrease with very little reason over the short term.
However, industrial users need the commodity to sell their products, and we can calculate their demand versus the supply. Car sales, as we all know, are rising substantially from the previous lows over the past couple of years. This rise is creating a tremendous investment opportunity for precious metals such as platinum and palladium because supply is not able to keep up with demand.
As I stated in my article last month when platinum was trading at $1,300, production problems will most likely create a shortage of platinum supply over the next year. Combine that with strong demand from vehicle sales, and this helps create a floor in the price for platinum.
I also told my friend not to blindly buy any precious metals—or stocks, for that matter—without seeing money flow into the asset. With precious metals being under pressure for much of the year, this was from shorter-term traders and investors. As I’ve stated many times before, wait to see price action begin to move, as this will be a sign that the selling pressure has ended.
I told my friend exactly what I wrote to my readers last month: while I do believe there will be a shortage of platinum, which will help price, waiting to see platinum begin to move up would then be a sign that most of the selling pressure is over.
The chart for platinum spot prices is featured below:
Chart courtesy of www.StockCharts.com
Since the time I wrote that article on platinum, the metal has rallied approximately $142.00. If supply problems do persist and demand remains stable, or even increases, there could still be a significant investment opportunity in platinum. As I’ve told readers many times, never rush into an investment opportunity—instead, enter a position one piece at a time.
With fundamentals strong, I would look to pullbacks as entry points for the platinum market. This would help create an advantageous average price paid for platinum. As long as supply problems are present, we should see platinum remaining an attractive investment opportunity for the near future.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.