Platinum and palladium prices jumped to recent highs last week on news that regulators had taken an important step towards allowing London-based ETF Securities (ETFS) to list physically-backed ETFs linked to the metals to trade on U.S. exchanges. “The Securities and Exchange Commission in the past week approved proposed rule changes from the New York Stock Exchange’s NYSE Arca platform for listing and trading of shares of ETFS Platinum Trust and ETFS Palladium Trust,” writes Allen Sykora. “The market construed this as tacit approval, although the SEC hasn’t given the final go-ahead and no launch date has been set.”
Platinum & Palladium 101
Platinum and palladium are both extremely rare elements, with each having much smaller annual output than gold and silver. Platinum and palladium are used most extensively in catalytic converters for cars and trucks, meaning that the prices of these metals can be impacted significantly by the health of the global automotive industry.
iPath has offered its Dow Jones-UBS Platinum Subindex Total Return ETN (PGM) since June 2008, but the proposed platinum fund from ETF Securities would be different from PGM in several ways. PGM, in addition to being structured as an exchange-traded note, is linked to an index consisting of a single futures contract on the commodity of platinum. The ETFS Platinum Trust, if ultimately approved, would physically buy and store the precious metal, as opposed to employing a futures-based strategy to gain indirect exposure to changes in spot prices.
Although most investors looking to gain precious metals exposure turn to silver or gold, platinum and palladium are popular hedges against inflation and general economic uncertainty as well. ETF Securities has offered physical platinum and palladium ETFs in Europe since April of 2007, and both products have proven popular with investors there. In the U.S., PGM has been very popular as well, with a current market capitalization of nearly $120 million.
Since launching its first U.S-listed fund in July, ETF Securities has seen massive cash inflows, and as of November 30 had about $465 million in total assets split between the ETFS Physical Swiss Gold Shares (SGOL) ETFS Silver Trust (SIVR). Precious metals ETFs have become tremendously popular in recent years as investors have looked to capture the potential diversification benefits offered by commodities. The SPDR Gold Trust (GLD) holds more than 1,100 metric tons of gold, more than all but four of the world’s central banks.
Commodity exchange-traded products have been one of the most active corners of the ETF market this year, with dozens of new product launches and huge cash inflows to existing funds. Following their respective launches, SIVR and SGOL racked up assets at an impressive rate, so it seems likely that platinum and palladium products from ETF Securities should be big hits as well.
Disclosure: No positions at time of writing.