July 24, 2024

Platinum Soars $78 On Week As Bodies Pile Up In South Africa

South Africa continues to be wracked by violence as striking platinum mine workers clash with police.   In a confrontation between police and striking mine workers, a gunbattle resulted in the shooting deaths of 34 miners.

The center of the violence is at the Lonmin mine which suspended most production earlier this week when violence between rival labor unions resulted in the deaths of 10 miners.  The Lonmin mine is the world’s third largest producer of platinum.  South Africa is virtually the world’s sole source of platinum accounting for over 75% of total production.

As discussed in a previous post, the initial strike and violence at the Lonmim mine had virtually no impact on the price of platinum.  The majority of demand for platinum comes from the automobile and jewelry industries, both of which have seen weak demand due to a slowing world economy and outright recession in most of Europe.   In addition, a surplus stockpile of 4.5 million ounces of platinum, representing almost a year’s worth of demand has served to depress prices.

The time to buy often comes when there is no apparent reason to buy.   In “Platinum Perspectives – Time to Buy or Will The Bears Win?“, we argued that the steep $500 per ounce price decline since last year had already discounted reduced demand for platinum as well as the surplus stockpiles. Despite the apparently worsening fundamentals, platinum refused to drop decisively below $1,400 and rallied every time the price dipped below $1,400.

courtesy stockcharts.com

Even more intriguing was the fact that hedge funds had established the largest short positions is history in the futures market.  The crowd was definitely leaning in one direction.  Any news of further supply disruptions or an increase in demand for platinum would force bearish shorts to cover, resulting in sharply higher prices.  That is exactly what happened this week as fears spread that the increasing violence between police and striking platinum miners would result in further mine shutdowns.

Platinum soared by $78 on the week to close in New York trading at $1,479.

Will the unrest in South Africa spiral out of control?  As the world economy continues to get worse, social unrest has spread from one country to another resulting in toppled leaders, bloodshed and civil wars.  South Africa is a potential hotbed for social unrest and violence with a 25% unemployment rate, 50% of the population living below the poverty line and 50% of those under the age of 35 unemployed.

Prior to the violence at the Lonmin mine, miners had been on strike earlier this year for six weeks at Impala Platinum mine resulting in lost production of 120,000 ounces of platinum.  Unless the authorities and mine management can quickly contain the violence at the platinum mines, unrest could quickly spread to other mining operations and throughout South Africa.

South Africa is also a major gold producer ranking 5th in the world.  Although South African gold production recently declined to a 90 year low, annual production during 2011 was 190 tonnes, representing almost 8% of total worldwide annual gold production of about 2,500 tonnes.  South Africa’s annual production of gold declined from 400 tonnes in 2001 to only 190 tonnes in 2011, due to lower grade ore deposits and depletion of existing mines.

Proof American Platinum Eagles can be purchased by consumers directly from the U.S. Mint.  The U.S. Mint recently announced that production of the 2012 Proof American Platinum Eagles will be set at 15,000 coins.  The Mint has been producing the proof platinum eagle coins since 2009.  Initial pricing per coin for the Proof American Platinum Eagles was set at $1,692.