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Platinum upgrade to golden reserve seen as monetary alchemy

Sep 08 2015 12:36

Johannesburg - The mining industry, unions and the government want to boost platinum's sagging fortunes by promoting it as a South African Reserve Bank (SARB) asset, but upgrading the metal to gold's coveted financial status will be an uphill struggle.

Obstacles to this attempt at monetary alchemy are many: the small size of the platinum market, gold's long history as a store of value, and the inherent aversion to risk shared by most central bankers.

The initiative, part of a bid to stem job losses in the mining sector, aims to have the white metal treated as an official central bank reserve, like gold and foreign currency holdings.

 Platinum's primary role at present is industrial, as a component in emissions-capping catalytic converters used in automobiles.

South Africa accounts for about 70% of global platinum production, and so has the most to gain from such a development at a time when the metal's spot price is near six-and-a-half-year lows below $1 000 an ounce.

But the South African Reserve Bank, which would need to champion the notion for it to gain traction, signalled on Monday it was cool to the idea.

"The SARB has had numerous approaches by interested parties over the years to consider adding platinum to its official reserves," said Hlengani Mathebula, head of the SARB's group strategy and communications.

"Feasibility studies conducted by the SARB previously around the possibility of adding platinum to reserves ... suggested that the status quo should remain."

Size and liquidity count

While technically central banks can hold anything they want, reserve assets are set out in guidelines drafted by global bodies, including the International Monetary Fund (IMF) and central banks.

Under those guidelines, gold is a reserve asset, but platinum is not because it is not viewed as a financial asset that can be used to meet balance-of-payments financing needs.

"Whether platinum fits in with the rules and regulations of the IMF is very important," Paul Wilson, chief executive of the World Platinum Investment Council, said.

"But our interpretation of the regulations is that there's enough flexibility that platinum is an attractive alternative that should be strongly considered."

"The platinum market is just too small. China has $3.7trn of foreign exchange reserves. To keep 1% by value in platinum, at $1 000 an ounce, would need 37 million ounces of platinum, which is six years' mine supply," said Matthew Turner, an analyst at Macquarie.

"To get 0.1%, you'd only need to buy two-thirds of a year's mine supply, but why would you want to hold 0.1% of your reserves in platinum? What use would that be to anyone?”

The gold market is much larger and has a deeper history as a financial asset due to the "gold standard", under which currencies were pegged to a specified amount of bullion.

The South African initiative is calling for a push to get support from the BRICS group of emerging economies - Brazil, Russia, India, China and South Africa.

"If you’re talking about the smaller BRIC nations, there is adequate liquidity if platinum were held at a ratio of five to one, or eight to one, versus gold in a typical portfolio," the WPIC's Wilson said.

Russia, as the world's second-largest platinum producer, could be an easy sell.

Moscow and Pretoria floated the idea of an OPEC-style platinum cartel two years ago.

But little has come of that, not least because crude production in places such as Saudi Arabia is firmly in the hands of the state - in the Saudi case, through the national oil company Aramco. The platinum industry has no real equivalent.

The Russian central bank declined comment on the initiative or whether it holds platinum. It is known to hold strategic palladium stocks but the amount is a state secret.

platinum  |  economy  |  commodities
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