Rough Days Ahead For The Platinum ETF

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Includes: PGM, PPLT, PTM
by: Zacks Funds

Thanks to a stronger dollar led by expectations of higher interest rates, many of the commodities have been reeling under pressure this year. The broad-based DB Commodity Index Tracking ETF (NYSE:DBC) is down 4.5% this year, indicating that the pain has been felt across the broad.

In fact, the precious metals space has been one of the worst performers with ETFS Physical Platinum Shares (NYSEARCA:PPLT) down 10.8% since the start of the year. Despite a long-term deficit, which indicates a bullish trend, the sentiment for the precious metal has been weak. Last week, platinum prices were trading near the $1,060/oz mark - falling to their lowest levels since 2009 - hit by strong supply.

Supply Glut

Unlike last year, wherein labor unrest crippled the output of South Africa - the world's biggest platinum producer - production this year has returned to levels ahead of the five-month strike in 2014. A sharp depreciation of the South African rand - which has fallen to a 14-year low against the dollar in early June this year - has been the primary factor for the flood in supplies. A weaker rand lowers costs for South Africa's miners, offsetting falling platinum prices and providing them with an incentive to keep producing.

Johnson Matthey plc (OTCPK:JMPLY), one of the biggest makers of platinum-based chemicals, estimates that platinum supplies from South Africa are expected to jump by nearly 20% this year, the largest year-over-year gain since 1993, as per an article by the Wall Street Journal.

Other Factors

Apart from the supply glut, investors' sale of shares of the physically backed platinum ETF is also pushing supplies higher and dragging prices down. Slowing growth in China - the world's top consumer of platinum for jewelry - has also been a cause of concern. Chinese platinum imports fell 11% year over year for the first four months of the year, per TD Securities.

Adding to the concerns, European car sales rose at the slowest pace in six months in May. Platinum is a key component of catalytic converters, so when car demand falls, platinum demand tends to fall as well.

Thus, given robust supply and dwindling demand, platinum might have a rocky road ahead. This is also expected to dampen the performance of PPLT.

PPLT in Focus

Launched in January 2010, this ETF tracks the performance of platinum's price and is quite a popular fund in the precious metals space managing assets worth $550.8 million. The product invests in bars of platinum and holds them in a secure European facility on behalf of the custodian, JPMorgan Chase Bank.

The product charges a decent 60 basis points a year and has an average volume of more than 32k shares traded a day. PPLT is down 10.8% in the year-to-date frame.

There are also a few ETNs in the platinum space including the iPath DJ UBS Platinum TR Sub Index ETN (NYSEARCA:PGM) and the UBS ETRACS CMCI Long Platinum TR ETN (NYSEARCA:PTM). Both of these suffer from lower assets and low volume levels, though they have seen similarly bad performances in the year-to-date frame.

Bottom Line

A strong dollar and a weaker rand have been the primary factors boosting South Africa's platinum supply. Diverging monetary policies across the globe is to be blamed for the raging currency war. Apart from this, slowdown in China and falling car demand in Europe are also supporting lower platinum prices.

However, European car registrations, a proxy for sales, have increased 6.9% to 1.17 million units in April - the best sales volume for April since 2009. Nonetheless, it remains to be seen whether the momentum can sustain or not, boosting the demand for platinum, or will platinum prices continue their downtrend led by a supply glut.

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