Platinum group metals (PGMs) are rarer than gold. The group consists of two subgroups: palladium group-platinum group elements (PPGEs) and iridium group-platinum group elements. The first group consists of platinum, palladium, and rhodium. The second group consists of iridium, osmium, and ruthenium. All are highly resistant to heat, do not tarnish, are resistant to chemical attack, and are excellent conductors of electricity. Platinum was first discovered around 700 BC; the other platinum group metals did not make their way onto the scene until the nineteenth century.
In January 2016 the prices of platinum and palladium reached respective lows at $812.20 and $451.50 per ounce. In January 2016, the price of rhodium was trading at just below $900 per ounce.
In 2008, platinum reached its all-time peak at $2308.80 per ounce. Palladium hit its high at $1133 in January 2013. Both platinum and palladium futures trade on the NYMEX division of the CME in the futures market. Rhodium only trades in the physical market, and its record high came in 2008 at just over the $10,000 per ounce level making the PGM the precious metal that traded at the highest price in modern history.
On August 6, the price of platinum was trading at around the $824 level, $11.80 above its early 2016 low. Palladium was at $900 per ounce, a little under double the January 2016 high after hitting a peak and record level during the first month of 2018. Meanwhile, rhodium was trading at a midpoint value of $2260 per ounce, just over 2.5 times the price it was at the start of 2016.
Platinum and rhodium's respective price paths are a tale of a bear and a bull. Both industrial precious metals have a myriad of industrial applications, but rhodium has been a star performer while platinum has been the dog of both the PGM and precious metals markets.
As the monthly chart highlights, the price of platinum plunged from its record high of $2308.80 in March 2008 to a low of $761.80 in October of the same year. The price carnage that took platinum 67% lower in just seven months has likely caused many investors and market participants to think twice before dipping a toe into the platinum market on the long side over the past decade.
After recovering back to a high of $1918.50 in August 2011, the price of platinum has made lower highs and lower lows. In January 2016 it fell to lows of $812.20 per ounce, and after another attempt at a recovery that took the price to just under the $1200 level in August 2016, it has been all downhill for the price of the precious metal. During July 2018, platinum slipped to a low of $796.90 which was the lowest price since December 2008. October platinum futures on NYMEX were trading at just over the $824 per ounce level on Monday, August 6 as the bounce from July's lower low has been anemic.
As the quarterly chart illustrates, palladium moved from $451.50 in January 2016 to a high of $1133 per ounce during the first month of this year. The price has since corrected lower, but at the $900 level on August 6, the price was still close to double the level in early 2016. Meanwhile, rhodium appears to have taken the bullish baton from the palladium market as that has been the PGM bull so far in 2018.
The price of rhodium moved from $910 to over the $2200 per ounce level over the past year, as the price has more than doubled in one short year. In 2016, rhodium dipped below the $600 per ounce level.
Rhodium is a byproduct of platinum mining that has applications in the chemical and automobile industries in catalytic converters.
With no primary mines for rhodium, supplies are falling as Impala Platinum Holdings, and Lonmin Mining shut unprofitable shafts because of lower platinum prices. The rhodium market suffers from limited liquidity and is dominated by a small number of participants. Additionally, there are limited above ground stocks to meet demand. Johnson Matthey PLC expects that last year's small rhodium deficit will move to a surplus of 68,000 ounces in 2018. In 2019 and beyond, improving economic conditions around the world could cause demand to increase and push the fundamentals back into a deficit.
The price of rhodium has held up better than platinum because both rhodium and palladium are primarily used in gasoline-powered automobiles while platinum has traditionally been required for diesel-powered automobile engines. However, a slowdown in Chinese economic growth could thwart the upward momentum in the rhodium price if demand from Asia retreats.
Meanwhile, the price action over the past year could be a sign that a dominant market player is accumulating rhodium, and with an all-time high at above $10,000 per ounce, there is plenty of upside room in the rhodium market.
Rhodium is only available in the physical market. Coin dealers offer one and five-ounce rhodium bars. The two refiners that mint the ingots are Baird & Co, and PAMP, the Swiss refiner. Baird& Co recently launched the world's first legal tender coin made of rhodium, the Tuvaluan $100 coin that one ounce of .999 pure rhodium metal. The coins are legal tender in the South Pacific island of Tuvalu, which was a member of the British Commonwealth until 1978. The bars and coins are the only direct route for investment in volatile rhodium market.
A bear market in platinum could continue to boost the price of rhodium as production falls due to mine closures as the price of extracting platinum from the crust of the earth becomes a losing proposition.
Meanwhile, perhaps the most bullish factor in the platinum market these days is the rise in the price of rhodium because of a cutback in platinum products. From 2016 through 2018, the price of palladium soared and reached a new record high. These days, rhodium has more than doubled in value compared to its price last year at this time. However, platinum continues to trade near its lowest price in a decade. It is possible that platinum is at or close to a significant bottom because when production slows, inventories tend to decline and as demand increases at low prices leading to price recovery. Global stockpiles of platinum are nowhere near the levels they are in gold and silver. Platinum demand for investment is much smaller than in gold and silver, and industrial demand on a per ounce produced basis is much higher for platinum. In the platinum market, mine closures in South Africa could be the spark that ignites a long overdue rally in the platinum market. The primary production cost of platinum is very high compared to other precious metals as occurs deep in the crust of the earth making its extraction an expensive proposition.
Platinum has been one of the most frustrating trades from the long side since it slipped to a discount to the price of gold in 2014. Over the past four years, the precious metal that goes by the nickname "rich man's gold" has been anything but that as it fell to a low of $450 under the price of gold and remains at a $387 discount to the yellow metal as of August 6. Platinum also slipped to a discount against the price of palladium and was trading at a $79 discount to palladium as of the beginning of this week.
Platinum is both more liquid than palladium and rhodium, and it has a history as an investment metal. Industrial users can substitute platinum for both palladium and rhodium, and at a lower price these days it is likely that demand for platinum will increase. At the same time, platinum has a higher melting and boiling point, and it is denser than both palladium and rhodium making it an even more suitable metal for industrial purposes.
As the chart of the Physical Platinum ETF product PPLT shows, it has traded in a range from $75.85 to $189.20 since 2010. On Monday, August 6 it was trading at just above $78 per share which is close to the lowest level in eight years. With $436.69 million in net assets and an average of 86,380 shares trading each day, PPLT is a liquid product that does an excellent job replicating price action in the platinum futures market. The expense ratio is at 0.60%.
Rhodium has taken the bullish baton from palladium this year, but it may be only a matter of time before platinum finally stages what is a long overdue comeback as production is on the decline and that tends to be the most significant sign of a bottom in any commodity market.
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This article was written by
Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.Over the past two decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.