Trading Platinum and Palladium Ahead of the ETF Launch

By Laura Crigger

Earlier this month, London-based ETF Securities [ETFS] filed papers to bring the first bullion-backed platinum and palladium ETFs to the U.S. - a move that may shock many longtime precious metal investors.

After all, the last time the idea of stateside platinum and palladium ETFs was floated, way back in 2007, it met with so much resistance that ETFS chairman Graham Tuckwell personally quashed the rumors, telling Reuters, "I don't think there will be a listed platinum or palladium ETF in the United States."

This time, however, the filing was met with almost complete silence. What changed?

Blame it on the Big Three. The auto industry's collapse has changed everything, making it possible for ETFS to bring its platinum and palladium funds - already very successful in Europe - to the States.

But as investors grow increasingly hungry for safe havens and cold, hard bullion, could the new funds mean shortages ahead?

The Catalytic Converter Demand

Platinum and palladium aren't just for bridal rings, although their popularity as jewelry in China, Japan, the U.S. and elsewhere makes up roughly 20% of demand. Instead, platinum and palladium are primarily industrial metals, used in everything from computer hard drives to fertilizers to fiber optic cabling.

They're especially useful in auto manufacturing, where the metals-especially platinum-are key ingredients in catalytic converters, which clean up noxious car exhaust fumes. Car manufacturers now account for about 55% of global platinum and palladium use, making the industry extremely vulnerable to metal shortages and price increases.

That's why U.S. automakers became so concerned two years ago, when ETFS first introduced its European bullion-backed platinum and palladium ETFs. Similar funds in the U.S., they argued, would tie up so much bullion that shortages would be inevitable.

Platinum miners also protested, arguing that hoarding would drive up short-term prices and devastate long-term industrial and jewelry demand. Anglo Platinum and Impala, the world's largest platinum producers by volume, even publicly refused to supply platinum for the new funds.

Their worries weren't entirely unjustified, either: At 6 million troy ounces of demand in 2008, the platinum market is much smaller than gold's, at 107 million ounces; or silver, at 889 million ounces. Because an ETF would remove physical metal from the market, even a small one could considerably impact prices.

But a lot can happen in two years. The global auto industry has since collapsed, and for the moment, U.S. car makers clearly have larger problems at hand than the cost of their catalytic converters. That preoccupation has not gone unnoticed by ETFS, who has pounced on the opportunity to file its new funds.

If approved, ETFS' new funds would allow U.S. investors access to physical platinum and palladium bullion, with the share price of each equal to 1/10^th the value of an ounce of the respective metals, according to the ETFS Platinum Trust and Palladium Trust registrations.

White Metal Supply And Demand

Of course, there's no guarantee that the SEC will even approve the filings, says the Wall Street Journal, given the debate over speculation in raw materials prices. And even if the funds are approved, they still face major supply and demand headwinds.

In 2008, platinum and palladium prices peaked and then tumbled into free fall, with palladium dropping 50% and platinum almost 65%. Shriveling auto demand accounted for much of the decline, but oversupply in both metals also depressed prices. Surpluses are expected to continue well into 2009, and perhaps even 2010. In that case, an ETF might actually prove beneficial, by removing some metal from circulation.

If and when auto sales will recover remains unclear. There are some bright spots in the industry, like China: In March, the country's car sales rose 10%, and minivan sales rose 40% over levels from the same time last year. German car sales have also gotten a shot in the arm from "cash-for-clunker" programs, in which the government offers consumers incentives to trade in their old vehicles for newer, higher-efficiency cars.

The increase in auto demand, as well as news of a $153 billion economic stimulus package in Japan (typically a huge consumer of platinum), have helped to send prices of both metals back up to their highest levels in six months.

Although industrial demand remains shaky, it hasn't stopped individual investors from seeking out platinum and palladium as safe havens, judging by the success of ETFS' existing European funds. ETFS' Physical Platinum ETF (LSE: PHPT.L) and Physical Palladium ETF (LSE: PHPD.L) have skyrocketed over the first three months of 2009, with the platinum fund's holdings rising 87% and palladium's rising 64%.

"The surge of inflows into physically-backed precious metals ETCs in the first quarter is unprecedented and reflects investors' concerns about current highly uncertain economic and financial conditions," Nicholas Brooks, ETFS Head of Research and Investment Strategy, told Commodity Online.

Playing Platinum And Palladium Before The Launch

If ETFS succeeds in launching its platinum and palladium ETFs, the funds would surely drive up demand, since investing in the fund would mean taking physical metal off the market and storing it in a vault. Therefore, investors may want to consider entering the platinum and palladium markets before that demand surge occurs.

To do so, U.S. investors have several pure-play options available to them. For example, NYMEX offers futures contracts for both platinum and palladium, trading in lot sizes of 50 troy ounces and 100 troy ounces, respectively.

Investors can also check out ETNS like the E-TRACS UBS Long Platinum ETN (NYSEArca: PTM), the E-TRACS UBS Short Platinum ETN (NYSEArca: PTD) or the IPath Dow-Jones AIG Platinum Total Return Sub-Index ETN (NYSEArca: PGM - although as credit notes, these instruments don't hold any physical bullion. Another ETN, the Elements MLCX Precious Metals Plus Index (NYSEArca: PMY), which held positions in both metals as well as gold and silver, closed earlier this year.

But given the potential for future price increases, individual platinum and palladium mining companies might be the best bet. Many miners only trade on foreign exchanges, but some companies available to American investors include:

• Stillwater Mining Co (NYSE: SWC), a Montana-based company that mines, refines and markets palladium and platinum. (Brad Zigler investigated this company in detail last year in "Good Days for Palladium?")
• Anglo American PLC (Nasdaq: AAUK), which mines a range of metals, as well as diamonds and coal.
• North American Palladium (AMEX: PAL), which despite its name also mines platinum, copper and nickel.

Want To Know More?

Learn about the platinum-to-palladium ratio in "Platinum's Poorer Relation: Palladium" and the effects of last year's platinum hoarding for European ETFs in "Platinum Supplies Hoarded By ETFs."

Comments

[Delojozafado:]

Well this is all very interesting. Up until now I have refrained from buying the (LPLA.L), due to the additional brokerage fees involved. I have found the buying (AGQ) & (DGP) in partial positions actually works as it does for (TBT). Now we are warned by the pros that trading these double and triple leveraged funds are only for day traders because each time they turn in direction a great deal of equity is eaten up. After the last Fed meeting we saw the same spike in (TBT) we saw today. Some thing very dangerous is either going on with the basis for the US currency or the principle at risk in (TBT). So far if you have owned (TBT) since it was below $40 and added recently on dips below $43.50 you are looking pretty good. So far. Any way I just added another partial to my (PTM) position on Tuesday as platinum was knocked down hard. I managed to get those shares at $13.38. Not exactly at the bottom but a nice guess based on the action in the shares the previous day. Now (PTM) rallied back some today. I would not have to own this kind of stuff except that 65% of my portfolio is in investment grade corporate bonds. Now 90% of those are medium term out to '13 & a couple 15s. There is that 10% that is long term and so beaten down that I am just enjoying the decent coupons. I will have to follow this development of a platinum ETF if it gets legs. In the meantime I may just call my broker on any further "corrections" in the platinum price and pick up a couple partials of 400 and 300 of the (LPLA.L). The divergence between Platinum and Gold is still at a relatively bullish historical gap.

Then there are the rumblings about what Jethro Bodine once referred to as "some new kindah dollars". Back in his day he was surprised to find out about millions of dollars. That was when one of the Hunt Bros remarked on their losses in cornering the silver market. A billion here and a billion there and pretty soon you're talking about some real money. Now it is a Trillion here and a Trillion there etc..

The point at last, is now we hear of this thing called an "AMERO" ? An obscure bureaucrat in China grumbles and the (TLT) tumbles...What eventually happens when a great deal of the distressed debt finally defaults, the unemployment bennies run out from the jobs in the autos and their suppliers have yet to eliminate? Who will buy the ghost malls from Simon and Prologis as they morph into Ganeral & and Centro Properties? Paulson & Ben the Dollar Slayer said they envisioned the Frannie Mac s being preserved in their current structures. OOPs, like WHOOPs they then turned around and screwed the subordinated debt holders the preferred share holders. Based on the Baird driving Wachovia to less than a $ before the market came awake from that concussion and realized it was worth seven and BEN advising 2 years ago that the subprime mortgage slime creep was relatively well contained, how are we to believe this latest man behind the curtain act of stress testing banks. Now we actually see Timmy the "G" making his bones on the "Q". The only shoots that are credible at this stage are the Gold ,silver and platinum ones. Green shoots? Not even the money is entirely green these days. But then that is only the case in which the money is actually printed and not electronically created. This situation in the early phases so far makes the Wiemar Republic look like pikers.

Some ATM's are already featuring $50 bills as an option. It all creeps in this petty pace from day to day. The tale is told by a presumed idiot. Yet the (TBT) was a horse of a different color again on Wednesday as many took a peak behind the curtain and the ten year treasury "advanced" to over 3%. IF an (LQD) can manage a decent gain on a day when the Treasury's debt is being knocked back by a similar % then what happens to (LQD) if the S&P breaks through 750 when "they" sell in May and go away? The yield goes to 8%? Even as the share price keeps dropping?

Apr 29 09:38 PM

[djhbutler:]

If I am reading the CNBC.COM website correctly for PAL (North American Palladium) under investors, it is saying that KAISER-FRANCIS has in the last few days acquired more than 36% of this company. I have contacted the company to confirm this, but I have not heard as yet. If this is the case, it, I think, is significant news?


On Apr 29 09:38 PM Delojozafado wrote:

> Well this is all very interesting. Up until now I have refrained
> from buying the (seekingalpha.com/symbo...), due to the
> additional brokerage fees involved. I have found the buying (seekingalpha.com/symbo...)
> & (seekingalpha.com/symbo...) in partial positions actually
> works as it does for (seekingalpha.com/symbo...). Now we
> are warned by the pros that trading these double and triple leveraged
> funds are only for day traders because each time they turn in direction
> a great deal of equity is eaten up. After the last Fed meeting we
> saw the same spike in (seekingalpha.com/symbo...) we saw
> today. Some thing very dangerous is either going on with the basis
> for the US currency or the principle at risk in (seekingalpha.com/symbo...).
> So far if you have owned (seekingalpha.com/symbo...) since
> it was below $40 and added recently on dips below $43.50 you are
> looking pretty good. So far. Any way I just added another partial
> to my (seekingalpha.com/symbo...) position on Tuesday as
> platinum was knocked down hard. I managed to get those shares at
> $13.38. Not exactly at the bottom but a nice guess based on the action
> in the shares the previous day. Now (seekingalpha.com/symbo...)
> rallied back some today. I would not have to own this kind of stuff
> except that 65% of my portfolio is in investment grade corporate
> bonds. Now 90% of those are medium term out to '13 & a couple
> 15s. There is that 10% that is long term and so beaten down that
> I am just enjoying the decent coupons. I will have to follow this
> development of a platinum ETF if it gets legs. In the meantime I
> may just call my broker on any further "corrections" in the platinum
> price and pick up a couple partials of 400 and 300 of the (seekingalpha.com/symbo...).
> The divergence between Platinum and Gold is still at a relatively
> bullish historical gap.
>
> Then there are the rumblings about what Jethro Bodine once referred
> to as "some new kindah dollars". Back in his day he was surprised
> to find out about millions of dollars. That was when one of the Hunt
> Bros remarked on their losses in cornering the silver market. A billion
> here and a billion there and pretty soon you're talking about some
> real money. Now it is a Trillion here and a Trillion there etc..
>
>
> The point at last, is now we hear of this thing called an "AMERO"
> ? An obscure bureaucrat in China grumbles and the (seekingalpha.com/symbo...)
> tumbles...What eventually happens when a great deal of the distressed
> debt finally defaults, the unemployment bennies run out from the
> jobs in the autos and their suppliers have yet to eliminate? Who
> will buy the ghost malls from Simon and Prologis as they morph into
> Ganeral & and Centro Properties? Paulson & Ben the Dollar
> Slayer said they envisioned the Frannie Mac s being preserved in
> their current structures. OOPs, like WHOOPs they then turned around
> and screwed the subordinated debt holders the preferred share holders.
> Based on the Baird driving Wachovia to less than a $ before the market
> came awake from that concussion and realized it was worth seven and
> BEN advising 2 years ago that the subprime mortgage slime creep was
> relatively well contained, how are we to believe this latest man
> behind the curtain act of stress testing banks. Now we actually see
> Timmy the "G" making his bones on the "Q". The only shoots that are
> credible at this stage are the Gold ,silver and platinum ones. Green
> shoots? Not even the money is entirely green these days. But then
> that is only the case in which the money is actually printed and
> not electronically created. This situation in the early phases so
> far makes the Wiemar Republic look like pikers.
>
> Some ATM's are already featuring $50 bills as an option. It all creeps
> in this petty pace from day to day. The tale is told by a presumed
> idiot. Yet the (seekingalpha.com/symbo...) was a horse of
> a different color again on Wednesday as many took a peak behind the
> curtain and the ten year treasury "advanced" to over 3%. IF an (seekingalpha.com/symbo...)
> can manage a decent gain on a day when the Treasury's debt is being
> knocked back by a similar % then what happens to (seekingalpha.com/symbo...)
> if the S&P breaks through 750 when "they" sell in May and go
> away? The yield goes to 8%? Even as the share price keeps dropping?

Aug 10 12:50 PM

[Freya:]

Palladium: Please consider the Tata Motors $2,500 car. Which catalytic converter is more likely to be used?

Even in India's recession, TTM's production is supposed to be 10 times oversubscribed.

The sooner the ETF is approved the Better.

I already own PAL, might grab some TTM while I wait though.

Apr 30 02:57 AM