Mine Deeper to Understand Platinum and Palladium

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Includes: AQPBF, ELRFF, JUBPF, PAL, PALL, PGM, PLG, PPLT, PTNMF
by: True North

Back in September 2009, I had recommended two trades in the PGM (platinum group metal) space. (The the recommendation is here.)

Trade idea:

  1. Buy palladium , sell platinum.
  2. Buy a basket of palladium and platinum, sell South African Rand.

Duration: Medium to long term (3 months onwards)

I had focused on the first trade idea with more conviction as the markets at that time seemed to have run up strongly (in hindsight, they had a lot more to run; SPX is up 10% from September '09 levels. But as the cliche goes, hindsight is a b*.) and I thought that a relative value trade idea offered better risk reward than a pure directional bet. In retrospect, I like the choice I made. But lets look at the performance of those recommendations truthfully.

By the way, one of my personal beliefs is that investors tend to overstate their profits and understate their losses (generally) unless they publish audited data. Being cognizant of this human shortcoming, I force myself to be brutally honest with myself and you all, but nonetheless if I am unable to quell your cynicism, please feel free to apply your own discount factor to my analysis.

But here it goes:

Trade idea:

  1. Buy palladium , sell platinum. - is up about 27%
  2. Buy a basket of palladium and platinum, sell South African Rand. is up about 34%

Here are two Bloomberg graphs showing the performance: (Click to enlarge)
Palladium over PlatinumClick to enlarge

Palladium over Platinum: up 27% since September end 2009
PGM basket (60% palladium 40% platinum) priced in South African Rand
Basket of Palladium and Platinum, priced in South African Rand

Click to enlarge
The reasons why the trade worked:
1. I think fundamentals worked out in favor of Pd just as I had reasoned in the article, more EM auto demand -> more gasoline auto-catalytic converters - > more Pd demand than Pt.
2. Pd and Pt ETFs were launched in the US in December '09 and started trading in January 2010. They generally pushed up the prices of PGMs opening up more investor demand for the metals. PALL is the palladium ETF and PPLT is the platinum ETF.
Do we take off the trades?
I dont think so. I still think there is room for this trade to run, especially Long Pd. Short Pt, however, we should be a little more cautious about for the following reasons:
1. Electric vehicles: The greener planet movement is gaining ground, even though electric vehicles (EV) are still a small (almost negligible) percentage of total car sales they will increase in number. EVs don't use PGMs, they mostly use lithium batteries to store electricity. So, more focus on these EVs could be negative for PGMs in the long run.
2. China EV subsidy: Apparently China recently announced a $5000 EV subsidy. I don't have too many details on this news but would really appreciate if someone following Chinese markets could shed some light on it. When the Chinese put their heads down to something they get it done quickly (the benefit of avoiding democratic bureaucracies), thus their greener leanings could alter the dynamics of the PGM markets.
Another interesting thing to research:
So if this EV story has some merit to it (and I understand timing is a question mark, since EVs will take time to become common place), an interesting investment theme derived from this development could be the lithium market.
The New York Times recently had an article on "The Lithium Chase"
Disclosure: None in PPLT, PALL