&l;p&g;Speculators are starting to place bets on a recovery in the price of platinum in the belief that car makers will be forced to switch from high-priced palladium used in exhaust-gas emission control systems.
The two metals once traded at a similar price, and fulfill a similar function.
But a wide gap has opened over the past three years as demand for platinum, which is the preferred catalyst in diesel engines, collapsed after Volkswagen was found to have rigged diesel-emissions testing equipment.
Palladium, which is the preferred metal in gasoline engines, has soared from around $930 an ounce when the Volkswagen scandal broke to a latest price of $1522/oz.
&l;strong&g;Cheaper Than Gold&l;/strong&g;
Platinum has fallen over the same time from $940/oz to $840/oz, widening a gap with another precious metal that used to be cheaper, gold, which is currently trading at $1286/oz.
Historically, whenever a significant gap developed between platinum and palladium car makers switched to the cheaper metal because both act as catalysts in converting noxious gases such as carbon monoxide and nitrous oxide into less toxic compounds.
&l;img class=&q;dam-image bloomberg size-large wp-image-34382522&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/34382522/960×0.jpg?fit=scale&q; data-height=&q;814&q; data-width=&q;960&q;&g; Five and ten gram platinum bars. Photographer: Kerem Uzel/Bloomberg
Knowing which metal to buy for catalytic converters has been complicated by politics with Russia being the major supplier of palladium and South Africa the major supplier of platinum.
&l;strong&g;Dieselgate Hit Platinum Hard&l;/strong&g;
Of the two metals, platinum is more abundantly available but when sales of diesel vehicles fell after Volkswagen was prosecuted in the U.S. a surplus of metal quickly developed.
The flipside of the platinum surplus was the development of a palladium shortage.
Market forces are now starting to smooth out the disparity with investors boosting their exposure to platinum-backed exchange traded funds such as the EFTS Platinum Trust which has risen by 5% over the past month, in line with a similar rise in the price of the underlying metal.
However, palladium over the past month has risen by 11%, further increasing pressure on car makers to substitute metals and use more platinum.
&l;strong&g;Electric Vehicles Threaten Both Metals&l;/strong&g;
Whether history will repeat, and the price difference trigger a wholesale shift back to platinum, is a tricky question because both metals face a less certain future as sales of electric vehicles, which do not produce exhaust gases, increases.
&l;img class=&q;dam-image bloomberg size-large wp-image-43339668&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/43339668/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; The Volvo Polestar2 fully electric automobile sits on display on the Volvo Cars AB exhibition stand on the opening day of the 89th Geneva International Motor Show in Geneva, Switzerland, on Tuesday, March 5, 2019. Stefan Wermuth/Bloomberg
There is also the question of the over-supply of platinum which an industry group, the World Platinum Investment Council (WPIC), expects to widen even as investor demand grows by a forecast 5%.
But, whether the increase in demand has an immediate effect on the platinum price is uncertain because supply is also tipped to rise by 5%, an increase which could leave the platinum market with an ongoing surplus of 680,000 ounces by the end of the year, up slightly on the 645,000 ounce surplus at the end of last year.
&l;strong&g;Substitution Could Be Starting&l;/strong&g;
Speculators, however, appear to be believe that the price gap between platinum and palladium is creating an incentive for car makers to start switching with one estimate being that 5% substitution would create a 14% increase in platinum demand.
The chief executive of the WPIC, Paul Wilson, said it was encouraging to see demand for platinum growing.
&q;We believe ongoing efforts in product development through global partnerships, plus platinum&s;s discount to gold will support continued, solid, retail investment in (platinum) bars and coins,&q; Wilson said. &a;lt;donotpaginate&a;gt;