What's Driving Platinum to Record Highs

Speculators are pushing the price of platinum to record levels, a trend analysts tell MoneyNews is likely to continue for the short-term.

Platinum hit a record $1,812.75 a troy ounce during recent intra-day trading and could nearly double in price in the coming months -- if production problems continue in South Africa.

Mines were shut down for five days during January because of power cuts. The industry is also beset by major labor problems.

"Five thousand dollar an ounce platinum will become a reality very quickly,” says James DiGeorgia, editor of the Gold and Energy Advisor newsletter.

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That's because supply of platinum is drying up fast. South Africa's platinum miners, including the world's three biggest producers of the metal, are being forced to suspend mining operations.

HSBC now predicts a "substantial supply deficit” of 488,000 ounces this year and has raised its 2008 average price forecast for 2008 and 2009 for platinum.

The energy and labor problems are the primary factors causing that reassessment, even though Eskom Holdings, South Africa's state-owned power utility, is telling the media that generation is back on-line.

Scarcity of proper mining equipment, safety issues, and other factors are also conspiring to raise the industry’s costs, factors affecting the top three platinum producers of that metal in the country, analysts indicate. DiGeorgia sees the problems continuing to drive share prices for mining companies with South African operations lower, and to cause spot platinum prices to surge. Prices have already leapt as much as $67 an ounce in a single day, DiGeorgia notes.

Peter S. Cohan, a member of the economics faculty at Babson College and president of consulting firm Peter S. Cohan and Associates, has tracked the price of platinum from 2004 through 2007.

He says there are other, less visible factors contributing to the price volatility. "Platinum prices seem to rise as oil and gold prices rise,” says Cohan.

What is more, there also seems to be a lot of hedge-fund buying of platinum, as well as purchases of the metal by exchange-traded funds. "I suspect that platinum prices will rise,” says Cohan.

There could also be a readjustment of market psychology, due to the current problems, experts indicate.

"Supply interruptions will show the South Africans that $2,000 platinum won't hurt the amount of dollars they're taking in for their production,” says DiGeorgia.

"They'll quickly realize they can raise the price of platinum, sell 20% of the metal, and will actually receive more net dollars.”

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