What it means
Platinum belongs to a group of metals known as the platinum group metals, which also includes palladium and rhodium. It is valued for its resistance to corrosion, its high melting point and its ability to speed up chemical reactions.
Most of the world's supply comes from a small number of countries, with South Africa the largest source. The biggest use is in catalytic converters, which clean the exhaust gases of vehicles.
This links platinum demand to the car industry and to emission rules. Other uses include jewellery, chemical production, glass making, medical devices and electronics.
Investors buy platinum through bars, coins, exchange-traded funds and futures contracts. A troy ounce, the standard unit for precious metals, is about 31.1 grams.
Futures contracts trade on commodity exchanges, and the price is quoted in dollars per troy ounce. Because industry takes a large share of platinum, its price tends to move with economic conditions more than gold does.
Gold is held mainly as a store of value, while platinum is often seen as a mix of precious metal and industrial metal. In some periods platinum has traded above gold, and in others well below it.
For businesses, platinum can be a cost, an asset or a risk. Car makers and chemical firms buy it and may hedge the price with futures, while jewellers hold it as stock.
Finance teams must account for price swings that can change inventory values and margins. Supply is limited by mining and by recycling.
Mines can be disrupted by labour disputes, power shortages or accidents, and recycled metal from old catalytic converters adds supply when prices are high. Anyone investing should be aware of storage, insurance and the gap between buying and selling prices.
In practice
Real-world examples.
Example
A car components maker buys platinum to coat catalytic converters. Its treasurer buys futures contracts to fix the price for the next six months. This protects the company's margin if the metal becomes more expensive, and it makes the annual budget easier to set.
Example
A jewellery business holds platinum stock worth $400,000. When the metal price rises by 10%, the stock gains $40,000 in value. The finance team updates its inventory valuation and reviews its insurance cover, since the higher value means a bigger loss if the stock is stolen.
Example
An investor buys a platinum exchange-traded fund to add a precious metal exposure to her portfolio. She likes that she does not need to store the metal herself or arrange insurance. She notes that the price can swing with car industry demand, so she keeps the holding small.
Formula
Calculation
Value = troy ounces x price per troy ounce
Cost to buy = value x (1 + dealer premium)
Assume platinum trades at $1,000 per troy ounce, which is a round figure used only for illustration. An investor holding 25 troy ounces has a value of 25 x $1,000 = $25,000.
If a dealer charges a premium of 3% over the market price for a bar, the cost to buy is $25,000 x 1.03 = $25,750. If the price then rises to $1,100, the holding is worth 25 x $1,100 = $27,500, a gain of $27,500 - $25,750 = $1,750 on the cost paid.Case study
Seen in the real world.
Kestrel Catalysts is a fictional manufacturer of emission control parts, and this story is illustrative. Each year it used about 2,000 troy ounces of platinum.
The finance director worried about a price rise from $1,000 to $1,200 per troy ounce, which would add 2,000 x $200 = $400,000 to its costs. She bought futures contracts for 1,500 ounces at $1,000 per ounce, covering three quarters of the expected need.
The price did rise to $1,200. The company paid more for the remaining 500 ounces, an extra 500 x $200 = $100,000, but gained $300,000 on its futures contracts, which offset most of the increase. The illustrative lesson is that hedging cannot remove a price risk completely but can make costs far more predictable.
Watch out
Common mistakes.
- Assuming platinum behaves like gold, when its heavy industrial use makes it more sensitive to the economy.
- Forgetting storage, insurance and dealer premiums when working out the real cost of physical platinum.
- Confusing a troy ounce with an ordinary ounce, when a troy ounce is slightly heavier and is the unit used for quoting precious metal prices.
Questions
People also ask.
Is platinum rarer than gold?
Yes, it is generally considered rarer, although price depends on supply and demand as well as rarity.
What is platinum mostly used for?
Its largest use is in catalytic converters, with jewellery, industry and investment following.
Does the word platinum have other meanings in finance?
Yes, it is also used for premium credit cards and top service tiers, which have nothing to do with the metal.
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