Why I Would Sell Platinum and Buy Palladium

Investors should sell platinum and buy palladium as platinum becomes expensive for industrial use. Approximtely 2/3 of the supply of platinum is used for industrial uses, primarily in car manufacturing (catalytic converters, spark plugs), high end electronic instruments, missiles, and jet engines. The rest of the supply is doled out for jewelry and held in ETFs for safe haven investments for investors. In the coming months supply restrictions, improving economic conditions and labor disputes will cause palladium to rise over the next year.

Since the drop in car manufacturing and the drop in world industrial demand last year, platinum went from over $2,000.00 an ounce to under $800.00 an ounce. Initially the price was above the $2K mark due to power supply restrictions from the South African government. South Africa’s electrical grid is still under capacity and new units won’t go online for at least 3 years, while in the meantime, world demand will pick back up.

Anglo platinum (AGPPY.PK) is in the midst of a labor dispute which is putting a dent in supply. This is just a catalyst and isn’t sustainable to the long term increase in platinum prices. I only mention it because it’s a catalyst that is artificially propping up platinum prices. I suspect when an agreement is made, then platinum will reverse course downward. Secondly, this highlights that where the majority of the world’s platinum is mined is still a volatile and turbulent economy.

The last two months have seen a stabilization of car sales as well as broadly improving economic indicators, which bode well for the precious metal. Wednesday marked the day congress passed the “Cash for clunkers” legislation which should put a floor in the new car sales decline, and will increase the scrap rate, thereby increasing demand for new cars. Just as important is the $15K new home tax that is being thrown around right now in the senate. These measures should put a bottom in housing and car sales.

Improving industrial numbers show life in the economy and will add to demand for platinum group metals. However, platinum is becoming more expensive for industrial users; due in large part from investors pilling into the metal as a safe haven demand alongside Gold and Silver. Note - Platinum is much rarer than any of these metals. As investors bid up the price, industrial users will switch to using palladium as a substitute, similar to Nat Gas and Coal for utilities; as coal becomes more expensive they switch to Nat Gas turbines. Car manufacturing switched some production to aluminum when steel peaked last year. Think of platinum as the rare expensive metal displayed in jewelry and palladium as the industrial grade brother. The industrial brother is going to play catch up as it is lifted by actual demand, while platinum should fall as speculative investors cash out the hot money.

Spreads, ratios, etc.

I look to the spread on platinum over palladium. When platinum is $1000.00 over palladium, platinum is expensive and industrial users are probably in the midst of switching over. Platinum may rise with economic indicators, in which case palladium will outperform, and if platinum falls palladium will probably fall but will still outperform. I’m not saying that you should outright short platinum - it may still rise. However, I would take this opportunity to stay in platinum group metals, but with protection against moves by speculative investors and hedge funds. There is a reason there isn’t a retail platinum ETF.

Comments

[GMiki1:]

I agree in re palladium to some extent, but only because North American Palladium has closed its main palladium mine, waiting for $800 palladium, which they feel is not far off. But because of a deep prior price spread between platinum and palladium, many car makers switched to palladium at that time previously, only to be caught by a rise in the palladium price. Once bitten, twice shy. We didn't see the switch when platinum rose last year--I think for that reason. It may be, also, that silver is the new palladium for catalytic converters.

But the idea that car manufacturing has been down is wrong. Do you simply mean U.S. auto manufacturing? There is a large world out there and the Chinese automakers have been producing steadily--also now in India, Tata Motors. This tells us something about the oil market, too.

Jun 11 01:04 PM

[Rohan C. Pease:]

GMiKi1 - Yes I was referring to US car sales, your right though on China, it is a big player and their car sales were blazin last month. As far as oil prices, I look to China and their ramp up of the Aoshan Petro Reserve, which is why $70 crude exists alongside 20yr high US Inventories. I do think that when the price of crude reaches tripple digits, Obama will release the from the SPR in the US.

Jun 11 05:50 PM

[TERN:]

I do not know how flexible the car industry is, when it comes to switching catalyst metals. I understand that retooling may be needed to use palladium for diesels.
Perhaps someone knowledgeable can enlighten us on this.

Jun 11 09:11 PM

[HATEFEEBAY:]

Hi Ho silver, but not stocks or ETF's, grab the real thing :-)

Jun 12 09:04 AM

[GMiki1:]

I have heard they need to retool to change to palladium.

I think we're past peak on oil, so I wouldn't look to any reduction in price. Oil production is down in most of the countries we import from, as is U.S. production year over year.

Jun 12 02:55 PM

[Rohan C. Pease:]

From Bloomberg this morning:

Platinum fell in New York, heading for the first weekly drop since mid-May, as the dollar strengthened after a report showed a record plunge in European industrial production. Palladium gained.

In April, manufacturing in the 16-member euro region fell the most since the data series began in 1986, the European Union’s statistics office said today. The dollar’s rally eroded the appeal of the precious metal. Most platinum is used in auto parts. Some investors buy the metal as a store of value when the dollar falls.

“The unexpected weakness in Eurozone industrial production is causing traders to re-evaluate previously bullish sentiment in the euro,” said Tom Pawlicki, an analyst at MF Global in Chicago.

Platinum futures for July delivery fell $21.60, or 1.7 percent, to $1,251.50 an ounce at 10:21 a.m. on the New York Mercantile Exchange. The most-active contract was down 2.7 percent for the week, after surging 26 percent in three weekly gains. The metal climbed 35 percent this year before today.

Palladium futures for September delivery rose 45 cents, or 0.2 percent, to $256.45 an ounce on the Nymex. The price has lost 1.3 percent for the week, after gaining for three straight weeks. Palladium advanced 36 percent this year through yesterday.

“We suspect that there is more to go on the downside, perhaps as we start the new week,” Edward Meir, an MF Global Ltd. analyst in Darien, Connecticut, said in a report on the metals.

EU Industrial Production

Output in the euro region dropped 21.6 percent in April from a year earlier. Economists expected a 19.8 percent decline, according to a Bloomberg News survey. From March, output declined 1.9 percent.

The dollar strengthened 0.9 percent to $1.3976 per euro in New York, from $1.4108 yesterday.

“In our view, commodity markets are still quite overbought, with the steep run-up in prices arguably over- compensating for the modest brightening we are seeing in the U.S. macro picture,” Meir said. “In addition, we are still somewhat nervous about the U.S. stock market.”

Jun 12 03:05 PM

[Lisa Reisman:]

Good analysis! It will be interesting to see the effects of this new EFT (if it gets approved) seekingalpha.com/artic... and how quickly the price of palladium increases. Substitution in the automotive industry is a very long arduous process so the long term picture weighs heavier than the short term...

Jun 12 05:33 PM

[Rohan C. Pease:]

A month later....

Platinum is down 11.9% while palladium is down 7.1%, meaning if you would have went short platinum and got long palladium you would have a profit of 4.8%.

Note the profit margin has steadily increased as the spead over the two metals has receded from the 1K mark.

Jul 10 03:46 PM