Platinum better long term than gold?

JOHANNESBURG -

Platinum stocks are preferred as a medium to long-term investment over gold which recently saw powerful rallies in its price. This comes as platinum supply and demand fundamentals are firm and platinum companies are set to grow production volumes.

Mike Townshend, resource analyst at Foord Asset Management, told Mineweb today that platinum stocks would outperform gold over the next two to five years as platinum demand was driven by environmental legislation (62%) and the Chinese jewellery market (22%).

Platinum companies have the underground and capital resources to boost their production volumes and take advantage of demand growth.

This compared to gold companies which did not only have declining production but also had to contend with ageing mines and infrastructure and an increasing cost base.

"The rate of decline in gold production is slowing, but it is difficult to see where growth volumes will come from," he said.

Gold demand - over 60% of it - is driven by jewellery demand emanating mainly from India. But this demand is not certain as it depends on the success of India's harvest crops.

"Gold companies could certainly benefit from the stronger gold price if they were able to control costs.

"But South African gold companies have showed an alarming trend of cost increases as mines age and they mine further away from shafts, wage settlements exceed inflation, while productivity does not improve and grades decline."

Townshend said platinum companies had the benefit of by-products rhodium, ruthenium and nickel, which boosted earnings with their stronger prices. Platinum mining did not take place as deep below the surface as gold mining.

"Another factor is that platinum companies are generating sufficient money to pay good dividends and have adequate cash-flow to finance growth."

Townshend added that while both gold and platinum metals prices have rocketed, earnings of gold companies have not grown over the past ten years. The earnings of platinum companies grew more than tenfold over the same period.

He said the platinum sector was an example of an industry where earnings growth led share price growth.

"Between 1997 and 2007, when earnings from platinum companies grew more rapidly compared to gold companies, platinum shares outperformed gold shares by more than seven times.

"We have preferred platinum to gold for at least five years, and continue to hold this view."