By Dave Nadig
The launch of the platinum ETF last week serves as a fishbowl for trading in limited markets. Is the new ETF a guppy or a shark?
When the ETFS Platinum Trust (PPLT) started trading just over a week ago, we commented that the fund could hit its cap quickly. That cap—478,000 ounces—is the equivalent of a little over 7 percent of 2009 demand, or four times the available surplus.
The natural follow-on question was, “Will the ETF actually move prices?” With big long-term lenses on, the answer seems axiomatic—if there are new sources of demand, prices should rise. But like gold, it’s not like investors were shut out of the market. Investors have been able to buy physical platinum essentially forever, so any real precious metals bug was already hoarding. In that case, the argument goes that PPLT is simply an access vehicle: one that would absorb a shift in demand, not create de novo demand on its own.
Which is true?
Let’s go to the chart:
click to enlarge
This chart looks at the traded price of both platinum on the spot market (blue) and PPLT (red). The columns represent traded volume, in 10-minute increments since the fund started trading.
To my mind, the chart is pretty clear. Certainly in the first few days of trading, demand for PPLT not only coincided with a short run in the metal, but perhaps even more importantly, a short-lived disconnect between the stock exchange and metals buyers: Investors pushed up the price of PPLT quickly, while the metal lagged slightly behind.
That 2 percent windfall of the first few days shook out, and based on the coincidence of volume and price, those folks trading the pop from the ETF launch were net sellers.
But the most striking evidence comes in the four big trades on the right side of the chart. At 10:40 on Jan. 14, some 46,000 shares of PPLT traded in a hurry, and the price of both platinum and the ETF spiked half a percent. Even more telling, heavy trading on the open of Jan. 19 coincided perfectly with a spike in prices in both the metal and the ETF.
Correlation is not causation, but it's pretty hard to ignore those trends.
Of course, there’s another way to measure this—by looking at the price of platinum measured against the number of the actual shares in the ETF in existence. After all, the net shares outstanding of PPLT reflect the impact that the fund is having on the actual physical market; the more shares, the more platinum PPLT is keeping in its vault.
The stair-step represents the number of shares outstanding in PPLT, scaled to the cap (4.78 million shares), which I have little doubt the ETF will hit, sooner than later. All numbers are reported at the end of trading days, as creations and redemptions are processed at the end of the day. For instance, we know that on Jan. 14 and 15, PPLT closed the days with 1.45 million shares outstanding.
Creations have definitely slowed down, with yesterday’s report showing just a single new creation despite the substantial pop in platinum. This isn’t surprising: After all, this information is available to everyone, and platinum traders—those with real metals or futures accounts—are betting on the ETF rush as well.
As with the trading chart, it’s impossible to imply causality here. But it is clear that PPLT has found its U.S. investor base, and that investor base will keep driving new interest in the fund until the cap is hit. Of course, once that happens, spreads and premiums will get interesting. So far, PPLT has traded with fairly tight spreads—not the penny we expect of the fastest-trading ETF, but a thoroughly respectable 10 to 20 cents on a $165 share price. The fund has generally traded at a 10-20 basis point premium over the course of the day—not hugely unexpected since the fund is new, and a major convenience play.
While the potential for arbitrage is unlikely to let PPLT get massively out of whack, even when the cap is hit, there’s little doubt that that premium will rise, and spreads would become more opportunistic.
Ultimately, then, the question will be whether the SEC will relax PPLT's cap and allow it to grow beyond 7 percent of this year's demand. If that happens, we could really see PPLT start to drive the price of platinum higher.