Warning signs for platinum investors

Strange happenings are afoot in the platinum market…

Despite prices falling as much as 28% over the past year, investors are still betting heavily on further declines to come.

As the Wall Street Journal reports, “In recent months, a number of money managers have ratcheted up their bets on a decline in platinum prices to the highest level ever in the futures market.”

And the U.S. Commodities Futures Trading Commission says these positions now account for a third of the platinum futures and options market.

What exactly is going on?

Well, it seems the biggest problem lies with everyone’s favorite scapegoat… Europe.

Western Europe: Platinum’s largest market

According to the Wall Street Journal, Europe is by far the world’s largest market for diesel-fueled vehicles.

And platinum’s main industrial use is for the catalytic converters of these cars.

It’s estimated automotive sales in Europe are on pace to hit a 20-year low this year.

Knowing these facts, it makes sense why platinum has been on a steady decline. But things might get worse for the industry before they get better.

That’s because not only are platinum prices closely tied to the ups and downs of Europe’s automotive industry, South Africa controls 80% of the world’s platinum reserves.

And it’s estimated that over half of listed platinum miners doing business there are either taking on losses or are on the verge of doing so.

In other words, however rare platinum is in nature, there’s too little demand for it in our current market environment, leaving too much of it to go around.

Mining.com also reveals a number of new mining projects outside of South Africa that could further add to the supply glut over the next two years, especially if Europe’s fiscal crisis continues.

But that’s not all. In fact, there’s another red flag that’s making platinum investors nervous…Gold prices.

For the last 20 years, platinum has been the most expensive metal around.

But today, it’s trading at a 27-year low compared to gold. As I write, gold is just over $1,600 per ounce. Meanwhile, platinum is trading at just under $1,400.

The platinum-to-gold ratio generally indicates two things:

If platinum prices are higher than gold prices, the global economy is expected to pick up.

If platinum prices are lower than gold prices, it signals fearfulness about the future state of the economy.

But while the near-term prospects for platinum may look bleak, you can expect a big opportunity for the market as soon as Europe gets back on track.

And you can be ready for the rebound by keeping platinum ETFs such as ETFS Physical Platinum Shares (NYSE: PPLT) on your radar, which is designed to track the precious metal.

Another long-term approach may be investing in companies that will reduce exposure to the price swings and production disruptions coming from South Africa.

Stillwater (NYSE: SWC), an American platinum mining company based in Montana, is a great example. It’s the only U.S. producer of platinum and palladium and is the largest primary producer of platinum group metals outside of South Africa and Russia, the world’s largest and second-largest holders of platinum, respectively.

Bottom line: Just be patient. Global auto sales are rising all around the world, except in Europe. And as soon as the European economy turns around, platinum prices should be coiled and ready to shoot higher.