Platinum Supplies Horded by ETFs

Move over gold! Platinum has become the hottest commodity investment among metals. This past year exhibited an unprecedented rise in world platinum prices. Platinum prices hit a record of $2,273/ounce last March, which represented a 70% spike over the price in mid-August 2007, of approximately $1,265/ounce as recently reported in the International Herald Tribune. On June 9, 2008, the NYMEX Platinum futures contracts closed at $2,069 an ounce.

Industrial demand is not alone in causing the dramatic spike in platinum prices seen this year. According to some, European commodity-based exchange-traded funds [ETFs] exacerbated the price shock by bidding up the price of platinum for speculation. These ETFs hold platinum in bank vaults to back their securities. The ETFs do not consume platinum, so eventually their platinum holdings could be released on the open market. But as long as platinum prices keep rising, and investment flows keep coming, the ETFs will likely continue to expand and acquire more platinum rather than release their hordes.

The European-based platinum ETFs, including those managed by ETF Securities and Switzerland's ZCB, together own about 365,000 ounces of platinum as compared to about 40,000 ounces at the end of 2007. All of that platinum stored by the ETFs has been taken away from industrial users and no doubt contributed to the rise in platinum prices.

The question is, how much?

Demand Choked?

When ETF Securities and ZCB's funds were created in April 2007, two of the largest platinum suppliers by volume, Anglo Platinum and Impala Platinum, were quoted by Reuters as saying they refused to supply any platinum to the ETFs. The suppliers were justifiably concerned that the higher platinum prices caused by the ETF hordes would eventually choke off demand for platinum jewelry and pressure the automotive industry to substitute platinum's sister metal, palladium, in catalytic converters. Once the automotive industry changed its manufacturing processes to accommodate palladium, they would not be returning to the platinum market. The scenario predicted by the platinum suppliers appears to be playing out.

The U.S. does not have platinum ETFs, but Swiss global bank UBS introduced two exchange-traded notes (ETNs) - E-TRACS UBS Long Platinum ETN (NYSE Arca: PTM) and E-TRACS UBS Short Platinum ETN (NYSE Arca: PTD) - in May 2008. These ETNs track the prices of platinum futures contracts but do not require platinum to be held as security. ETNs are senior unsecured debt obligations issued by financial institutions and carry credit risk. They essentially represent a promise by the issuer to deliver the performance of an index, minus fees.

The new notes allow investors to take a bullish or bearish view on platinum. The E-TRACS UBS Long Platinum ETN simply follows platinum futures prices, while the E-TRACS UBS Short Platinum ETN works in the opposite direction for those interested in shorting the UBS Bloomberg CMCI Platinum Excess Return.

At the hefty price of $2,069/ounce, industrial users have financial incentives to substitute palladium and other metals for the more expensive platinum in manufacturing processes. Historically, the automotive industry represents the single largest source of demand for platinum, which is needed in manufacturing catalytic converters, especially in diesel cars and trucks. Catalytic converters are cylinders formed into a fine honeycomb, coated with a solution of chemicals and platinum-group metals, mounted inside a stainless steel canister and installed in the exhaust line of a vehicle to remove pollution particles.

The second-largest demand for platinum comes from the jewelry industry, followed by various other industries including chemical, glass and electronics manufacturing. According to the annual report of London-based platinum refiner and specialist firm Johnson Matthey released on May 20, 2008, global demand for platinum, one of the world's rarest metals, climbed by 8.6% to 7.03 million ounces in 2007. In other words, the world added approximately 600,000 ounces in new demand last year - more than half of it driven by the ETFs.

The world supply of platinum simply cannot match this demand. Supplies of platinum totaled 6.55 million ounces in 2007, according to the Johnson Matthey annual report, which represented an excess demand or shortfall in supply of 480,000 ounces. Most platinum is produced in just two countries: South Africa (80%) and Russia (15%), unlike gold and silver, which are mined in numerous countries around the world.

Ironically, the 2007 excess demand for platinum followed the first year with excess supply (2006) in eight years. According to the Johnson Matthey annual report, the excess supply of platinum in 2006 totaled 355,000 ounces. The company estimated jewelry demand for new platinum metal last year, net of scrap recycling, fell by 55,000 to 1.59 million ounces. However, global purchases of platinum by the automotive sector climbed by 8.2% to 4.23 million ounces last year.

Cheaper Palladium As Alternative

Platinum demand by the automotive sector would have been much higher than 4.23 million ounces, except that the industry aggressively responded to the increasing input costs for platinum by remanufacturing catalytic converters for gasoline engines to use much cheaper palladium instead of platinum. Yet the automotive industry has not been able to substitute away from platinum as easily for its diesel engines catalytic converters. But with prices on the order of $2,069/ounce, the industry has a powerful incentive to invest in new technologies for emission control that will reduce the industry's need for the white metal.

With production of this scarce metal so heavily concentrated in one country, any disruptions in South African supplies of platinum would have an immediate effect on world prices. When South Africa experienced power shortages in March 2008 and had to curtail power to the platinum mines, the price of the white metal reached its all-time peak. Unfortunately, South Africa has an aging power infrastructure, so power shortages and temporary disruptions will likely persist for at least the next five years, if not longer. Even rumors of power disruptions in South Africa could trigger periodic spikes in platinum prices for years to come.

The crux of the issue for platinum holders is how the see-saw of prices, demand and supply will tilt in the coming years. According to many industry analysts, the current high prices and worries about "supply shocks" from disruptions in South Africa are rapidly pushing industrial users of platinum to look for other approaches. If prices stay high - or if a combination of power shortages, ETF demand and other factors push prices higher still - that could ultimately lay the groundwork for a significant long-term drop in prices and total demand.

Comments

[EE]

Get ready to witness history or be a part of it if you own silver or gold ETFs You can speed the price rise time table! Here is a part of Ted Butlers June 16th '08 comments. I suggest a log on butlerresearch.com and read it all along with past reports.....
"So here we had evidence of delays in the delivery of both retail and wholesale silver. Many are loath to utter the word "shortage" in connection with silver. They believe that to be impossible or they think the word means no availability at any price. That definition is silly, as there will always be some quantity available at some price. A commodity shortage doesn’t mean that all the silver (or any other commodity) in the world suddenly disappears. The correct definition of a commodity shortage would revolve around delivery delays, not unavailability. In other words, a delay in delivery of both retail and wholesale forms of silver would constitute a shortage. Maybe not a severe shortage, but a shortage nevertheless. Such evidence of delivery delays, in the face of declining prices, should disturb believers in free market principles.
Although these delivery delays into the SLV well after the shares were purchased bothered me, I chose not to complain. (By the way, this pattern can be discerned by the uneven deposit pattern into the SLV compared to its trading volume). The main thing that bothered me was that the shares were being shorted at all.
I am going to make a very straight-forward statement. I don’t think short-selling of any kind should be allowed in the shares of the SLV, nor in the shares of the two publicly-traded gold ETFs, GLD and IAU. Of all the tens of thousands of different common stock and other traded securities that are regulated by the US Securities and Exchange Commission (SEC), these three metal ETFs are very unique and distinct from the rest. Out of tens of thousands of different securities, only SLV, GLD, and IAU call for a rigid metal backing, 10 ounces of silver behind each share of SLV, one-tenth of an ounce of gold behind each share of either GLD or IAU. Investors buy shares of these ETFs because they are assured that this specific metal backing exists. Investors buy shares knowing that the sponsors and custodians guarantee the metal to be there.
But what happens when someone buys shares in these ETFs and the seller is selling those shares short? Does the short seller deposit metal to back up the buyer’s purchase? No. The short seller just sells the shares short without depositing metal, perhaps borrowing other shares first, perhaps not. The buyer doesn’t know who he is buying from, he gets a confirmation of his purchase from his broker, pays for it and assumes, according the representations in the prospectus, that he is buying new shares issued by the sponsor who has deposited metal, or from an existing shareholder who has decided to liquidate his shares. It never occurs to the buyer that he is buying from a short seller who is not depositing metal. In essence, the short seller is circumventing what is promised in the prospectus. That party is short-circuiting and destroying the promise clearly laid out in the prospectus that real metal backs every share sold.
Here’s the disturbing question - which buyers’ shares are left without silver backing when short sellers are involved in the transaction? Just the hapless and unsuspecting buyer who was unlucky enough to happen to have his purchase short sold, or do all SLV shareholders get shaved proportionately, like a silver coin clipped in olden times? Don’t look to the prospectus for answers, because you won’t find any.
For those who were unaware of this and don’t understand how shares can be sold with no metal backing (or doubt my contention), there is hard proof. There is a short position list reported that proves short selling exists. Currently, the SLV shows a small published short position on the American Stock Exchange of around 250,000 shares, or the equivalent of 2.5 million ounces. On March 11, this reported short position hit almost 1 million shares, or nearly 10 million ounces. So, there can be no doubt that some short selling exists, which raises all sorts of disturbing questions. In my opinion, this aspect of the metal-only ETFs wasn‘t fully thought through before their introduction. Unfortunately, the problem may be worse than just this SLV short selling; maybe much worse.
WHAT’S GOING ON?
Around this past April 15 I began to notice a more pronounced delay of silver deliveries into the SLV. This was for much larger amounts of silver than I previously observed. In fact, the amount of short selling in SLV shares began to look extreme.
Just a short word on short-selling. Please don’t confuse this discussion on the short selling of shares of the SLV (and GLD and IAU) with the short selling I continually discuss in COMEX silver futures. I know this can be a complicated topic, but it is important for you to understand it. In futures, there must be a short for every long. Therefore, the problem in silver futures is not the presence of shorts, but the documented concentrated nature of this short position, namely, an extremely large short position held by just a few traders. Less extreme concentrations in other commodities have always been considered manipulative by the CFTC in the past; just not now in silver (and gold), for some reason.
In securities, there is no requirement that there be a short position for every share of stock. In fact, that would be absurd. But, due to relaxations in the restrictions on short selling over the past decade by the SEC, the new phenomenon of naked short selling has exploded. Naked short selling in stocks doesn’t involve first borrowing the shares in which to sell short. The naked short seller just sells short without borrowing shares. The short seller then fails to deliver the shares to the buyer on settlement date. The punishment for what is essentially a delivery default? The SEC puts out a (long) list of stocks which have fails to deliver. That’s all it does, it makes a list. No fines, no forced buy backs, no identification of who is naked short selling, no staying after school for detention. And yes, SLV is on that list from time to time. To SLV owners, that should be disturbing.
One last kick in the teeth for SLV and silver investors. All investors who purchase SLV shares must pay in full for their shares (or borrow from their brokers at sky-high margin interest rates). Not only do the naked short sellers not have to deposit a dime for their short sales, nor deposit one ounce of real silver, they receive the full cash proceeds that the buyers put up and get to earn interest and deploy that cash until they buy back their short sales. Which may be never, as no one is pressuring them. This is a Wall Street scam and fleecing of the first order".... ALSO CHECK OUT silverstockreport.com/... ......

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