The `i-word' pushes up platinum and silver
As far as anyone can tell, serious inflation has not returned, not yet anyway. But you might not know that from listening to all the talk about inflation lately, or watching the sales of precious metals. When the 5.4 percent unemployment figures for April were announced last week, those reports included - often in the same sentence - concerns that a tightening job market would lead to higher wages and thus higher prices. As a result of that and other signs, the ``i-word'' is being heard more often these days, and many investors are beginning to look for ways to protect their portfolios.
One of the more traditional ways is through metals like gold, platinum, or silver. Gold is well known as the classic inflation hedge, but investors are also showing more interest in silver and platinum. While prices of these metals are also tied to inflation, they have other characteristics that make them behave a little differently.
Platinum: precious to industry
``Platinum has different supply-and-demand fundamentals'' than silver or gold, says Andrea Gould, director of investments at Platinum Guild International. ``The dynamics are very different.''
About 85 percent of the world's platinum supply is used by industry, she says. A great deal of it is used in catalytic converters to control emissions from automobiles. Until last year, only cars made for sale in the United States and Canada used the converters, but that's changing. Starting with the 1988 model year, cars sold in Europe have them, too. The phase-in began with smaller cars and will be complete with the larger vehicles in 1991, Ms. Gould says. That will help raise Europe's use of platinum from 187,000 ounces last year to more than 450,000 by 1991, she estimates.
Because of its heavy use by industry, platinum is also a sort of business barometer. When the economy is growing, the price of the metal goes up, just as it goes down when business indicators are less favorable.
Platinum is also used in jewelry, where it is considered more durable that yellow or white gold - and does a better job of holding stones in place - and more resistant to tarnish than silver. While jewelers all over the world sell some platinum jewelry, it's especially popular in Japan.
``The Japanese use a great deal of platinum in their jewelry,'' Gould says. ``More than any other country. They buy a lot of platinum.''
While platinum is being used in more countries, it comes from very few places. The two principal producers are South Africa and the Soviet Union, although a mine is operating in Nyes, Mont.
This combination of growing demand and narrow supply has had the expected economic result: high prices. In March of 1986, platinum sold for about $240 an ounce, Gould says. By September of that year, it had leaped to $680. It has since slipped back - a little - to about $525 an ounce, but that's still some $80 an ounce more than gold.
For the average investor, the best way to buy platinum is in the form of a coin. Unlike gold or silver, which have coins produced by several countries, there is only one platinum coin. Called the Noble, it is legal tender on the Isle of Man and comes in one-ounce, one-half-ounce, one-quarter-ounce, and one-tenth-ounce sizes.
The coins can be purchased from many coin and precious-metals dealers, as well as through many brokerage firms. You should expect to pay a 5 to 7 percent premium over the quoted platinum price for the one-ounce coin, Gould says, and a higher percentage for the smaller sizes.
Silver: `poor man's gold'
``In the last couple of weeks we've seen a marked increase in silver coin sales,'' says Bruce L. Kaplan of A-Mark Precious Metals in Santa Monica, Calif. Interest in silver is higher, he says, because concerns about inflation are higher.
Unlike platinum, ``silver has performed quite poorly over the last couple of years,'' Mr. Kaplan says. ``Silver doesn't move in tandem with gold the way it once did.''
As an investment, silver is much more volatile than gold or platinum. On April 24, 1987, for example, silver started out trading for $11.25 an ounce, then fell to $7.20 and closed at $7.80. While that kind of one-day volatility is not common, it does happen over longer periods of time. The metal is currently trading at about $6.50 an ounce. This low price makes it much easier than gold or platinum for the average investor to buy, says Kaplan, who calls it ``the poor man's gold.''
Because the price of silver is so low, it doesn't take much of a jump to provide a nice return - or a sudden loss. A movement of 50 cents in either direction would mean a 7.6 percent gain or loss, if the price started at $6.50.
Apart from inflation, silver's fundamentals have been improving lately. The $6-an-ounce level seems to be a floor now, Kaplan says. Near or below that price, companies start closing down mines. ``So the downside risk is very low right now,'' he says. Most analysts see silver trading between $6 and $7 for much of this year, although increased inflation could push prices somewhat higher.
Like platinum, silver is also an industrial metal, and is used in electronic goods, computers, and photography. So it serves as an another economic barometer, with its sales rising as the economy expands.
Unlike platinum, silver comes from many mines in several countries around the world. This is the main reason its price is so much lower. The largest producer is Mexico; its Libertad coin and the US Eagle are the two legal tender coins Americans can buy to invest in silver. It's also possible to buy larger silver ingots, but these may be harder to store.
Mexico, Kaplan says, is about to make a splash in the silver market when it issues 12,000 ``proof'' Libertads. The one-ounce coins, each of which is individually numbered and struck at least twice to remove imperfections, will be sold through a limited dealer network about June 1 for $30 to $40, which includes a certificate of authenticity and a presentation case.
``That's an extremely low number'' for a mint to issue, Kaplan says, so it should sell out quickly.
How much is too much?
Many people don't consider platinum, silver, or any other precious metal an investment, like a company stock or bond, where the investor receives a return - or takes a loss - as the company's performance gains or lags. Some financial planners don't recommend metals to their clients at all, and those who do try to set some limits.
One such planner is Mark Bass of Lubbock, Texas. ``We've advised people to hold some part of their assets in tangibles all along,'' he says. When inflation was low and the economy was expanding - and before Oct. 19 - Mr. Bass recommended putting just 5 to 15 percent of investment assets in tangibles, including coins, gold, platinum, and silver.
Even now, with several indications that there will be higher inflation in the future, he wouldn't raise that level to more than 20 percent. But he doesn't think it will be too long before several of his clients reach that level.
``If people think inflation is dead, they're living in a different world,'' Bass says.