Remember the whole Volkswagen “dieselgate” fiasco? Unless you own a VW, it is probably fading from memory pretty fast.
However, for investors, the situation is worth revisiting. A great buying opportunity is presenting itself right now as a result of it.
It should come as absolutely no surprise that all of us at the Outsider Club see gold and silver as integral parts of any portfolio.
However, today we’re going to focus on some news from their distant relatives in the precious metals family: platinum and palladium.
Let’s get started with a look at the long-term fundamentals these metals offer to investors and what Volkswagen’s scheme has opened up for us.
Invest in What You Understand
A couple years back, I wrote a handful of lines that cut right to the core of one of my investment strategies:
Maybe I’m a bit old school in this regard, but I prefer to put my money behind things that are useful. That is, I want to own something that has a practical application.
This is why I never jumped on the Apple, Zynga, Groupon, or Facebook bandwagons. What’s more, their products and services simply don’t do anything that cannot be easily replaced.
Sure, keeping in touch with people you don’t particularly care about might be more difficult. And maybe you’d have to break out a digital camera on vacation, or go offline while commuting between your home and work computers. You might even be subject to clipping coupons from the Sunday paper to use at the grocery store.
My point is you can easily do these things without ever going near an over-hyped tech company.
I don’t want to put my money behind convenience. I want someone to desperately need what I have for sale. And I want them to have no substitutes or Plan B’s…
I was talking about silver at the time. I stand behind silver still and will keep doing so for the foreseeable future.
It is simply too useful in unique ways that cannot be replicated. In particular, its thermal and electrical conductivity, high reflectance, and extreme temperature range endurance makes substitutions compromise engineering and designs.
Bargain-bin spot prices make understanding how to invest in it — and gold — critical for today’s investors.
My argument for irreplaceable, industrially useful materials isn’t limited to silver, though, and it is equally applicable to platinum and palladium.
Both metals are absolutely essential to the catalytic converters in just about every vehicle on the road today. About 45% of platinum and 75% of palladium each year gets bolted to the bottom of a car or truck.
Palladium in particular, and platinum to a lesser extent, is not hoarded in safes and vaults; it goes straight to commercial manufacturers and is used.
About 10% of platinum is held by investors as a store of wealth. About a third of the platinum used ends up in jewelry.
In other words, there is no potential slack outside of the potential for mine supply to greatly exceed demand.
That, simply put, is not going to happen anytime soon.
Supply and Demand
You may remember the deadly South African mine strikes and riots a couple years back. That drove prices through the roof as supply was disrupted.
Since then, the situation has improved, but a long-term mismatch is in place.
Palladium’s deficit is expected to come in at 100,000 ounces for all of 2015, down from 1.8 million ounces in 2014. This year’s platinum shortage is estimated at 285,000 ounces.
For some perspective, this year’s platinum production is expect to land just shy of 8 million ounces, and palladium should end up around 9 million ounces for the year.
While the supply and demand mismatch has shrunk as mines started producing, they still cannot keep up. There is a fundamental problem with expanding supply at current levels, and it will only get worse.
The average global all-in cost of platinum production (including capital expenditures and indirect overhead costs) last year was $1,595 per ounce. Right now, the spot price is about $980.
It is wildly unprofitable to operate a platinum or palladium mine right now for all but a handful of companies, but every company needs to keep mining to stay solvent.
That means no new mines, no capital expenditures, and scaled-back operations.
And right as the South Africa issue fades from memory, Volkswagen comes along and freaks people out.
Panic Selling, Smart Buying
Following Volkswagen’s sneaky attempt to game the emissions standards for its vehicles, investors fell for a half-baked narrative.
They bought into the concept that the scandal would push automakers into greater emission reductions by rolling out cars with more batteries, thus easing demand.
This scenario is completely divorced from reality. Globally, we just passed 1 million electric cars on the road.
That compares to over 1 billion cars on the road worldwide right now and an estimated 1.7 billion on the road by 2035.
While electric car growth is great in developed nations, 1% of cars are electric, and overall car demand makes significant increases in this percentage very difficult.
The herd didn’t seem to take notice, though. Sentiment turned against platinum and palladium, and ETPs that track the metals took a beating, pulling down prices as well.
This shows the shortsighted, fundamentally flawed, sentiment-based trading in action.
Platinum and palladium will not see significant demand drops. In fact, they should see strong long-term growth for two decades to come.
And this sell-off is occurring right as miners are facing existential crises due to low prices and extremely high costs that will stunt supply growth for years to come.
We have an opportunity to get favorable prices on investments that have a massive upside, clearly defined catalysts to understand if an investment will pay off, and that cannot be sidestepped with industrial substitutions.
It doesn’t get much better than that.
