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Often priced at a premium to gold, platinum plummeted below its shiny cousin last year as investors fled from commodities. But when investors loosen their death grip on fear, and the economy comes to life again, platinum may very well assume a higher spot on the value totem pole.
Concentrated investments in small market niches should make up only a tiny part of most investors' overall portfolio -- if they bother at all. However, for those with a long-term outlook and the ability to take on significant risk, an investment in the platinum-owning iPath DJ AIG Platinum ETN (NYSE: PGM ) might prove profitable if the economy races ahead.
The iShares fund tracks an index that follows just a single platinum futures contract, so obviously, the fund is not diversified and is entirely dependent on the price of platinum. There are only a few places where platinum is mined in any significant quantity, with South Africa the leading producer, followed by Russia and Canada.
It follows, then, that there are only a handful of relevant publicly traded mining companies, including U.K.-based Anglo American (Nasdaq: AAUK ) , Impala Platinum, Stillwater Mining (NYSE: SWC ) , North American Palladium (NYSE: PAL ) , and Platinum Group. That limited universe makes it a risky proposition to put together a portfolio of platinum-mining companies.
- Return, 7/1/08 to 12/31/08: (54.6%)
- Expense ratio: 0.75%
- Net assets: $14.6 million
Fund prospects and risks
Platinum is used not just in jewelry, but also in industrial applications, primarily catalytic converters for auto manufacturers such as Ford (NYSE: F ) and General Motors (NYSE: GM ) . Last year, when industrial demand withered with auto sales, platinum prices fell below that of gold, which was highly sought for its perceived security. If the auto industry finally pulls itself out of its funk, platinum may be one of the early beneficiaries.
Platinum miners churn out a significantly lower volume of the grey-white metal than gold, and that limited supply can also help bolster prices, especially during supply disruptions in volatile producing regions such as South Africa.
Another significant risk for investors is that the fund is structured as an exchange-traded note. ETNs are debt instruments of the company that issues them, and an investor does not have rights to a pool of assets, as they do with an ETF. An investor has only a claim against the sponsor of the note, in this case Barclays (NYSE: BCS ) , rather than against a pool of assets.
During periods of economic growth, platinum is likely to perform well. But during economically depressed periods, this metal is likely to see its performance deteriorate commensurately, as it has over the past year.
For investors able to withstand the volatility and risk of a one-commodity fund, a small position in this fund might serve as a hedge for when the economy turns.