One Day, Platinum Will Shock The Market

Summary

• The laggard for too long.
• Weak versus gold since 2014.
• Weak versus palladium since 2017.
• Even Rhodium has soared.
• PPLT on all dips for the long term.
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We heard the word "patience" from the Fed last week when the U.S. central bank backtracked from their hawkish approach to monetary policy that dominated their decisions in 2018. Patience is "the capacity to accept or tolerate delay, trouble, or suffering without getting angry or upset." The synonyms for the term are forbearance, tolerance, restraint, resignation, stoicism, fortitude, sufferance, and endurance.

The Fed pledged that they would take a more prudent approach to increasing the Fed Funds rate over the coming months, but it will be economic data that ultimately drives their decision-making process. Following the late January message from the central bank, many market participants were anything but patient when it came to their approach to investing and trading. Stocks rallied in the wake of the Fed meeting as many called the pivot from a hawkish monetary policy the "Powell Put" on the stock market.

I have been a patient investor in the platinum market for far longer than I would like to remember. I have bought the metal on a scale-down basis since 2017 and have watched the price deteriorate and evaporate. With a renewed sense of fortitude, I am waiting for the day when platinum finally reflects its true nature as one of the rarest precious metals with a myriad of industrial applications. Based on the price action in gold, palladium, and even the rhodium markets, platinum remains far too cheap at its current price and patience is the one virtue I must remember so that I can participate when the long overdue correction to the upside finally arrives.

The Aberdeen Standard Physical Platinum Shares ETF product (NYSEARCA:PPLT) is a highly liquid instrument that does an excellent job tracking the price action in the platinum market as it holds 100% of its assets in platinum bullion.

The laggard for too long

Platinum continues to be a mangy precious dog with fleas, and on Thursday, February 7, the market provided me with another reminder of how non-precious metal continues to be these days. Gold settled Thursday's session with a loss of only one tick or 10 cents per ounce on the active month futures contract. Silver rose by 1.2 cents, and palladium futures posted a $6.50 per ounce gain on the day. On a day when three of the four precious metals that trade on the COMEX and NYMEX futures exchange were quiet to higher, platinum lost $16.50 per ounce on the active month April futures contract which put the price back below the $800 per ounce level as it settled at $797.30.

The action last Thursday is nothing new for the platinum market which has been falling since 2011.

Source: CQG

As the monthly chart highlights, platinum reached its all-time peak back in 2008 when the price rose to $2308.80 per ounce. The global financial crisis later that year sent the price plunging to a low at $761.80 as risk-off in markets across all asset classes caused all markets to lose significant value.

Platinum recovered to a lower peak at $1918.50 in 2011, but it has been all downhill since then as the metal has made a consistent series of lower higher and lower lows. The last substantial attempt at a rally came in 2016 when the price fell just shy of the $1200 per ounce level. The most recent low took the price of NYMEX platinum futures to a low at $755.70 in August which was the lowest level since way back in 2003. The monthly chart shows that the price momentum and relative strength of the platinum futures market are in oversold territory. Monthly price volatility at 13.58% reflects the slow and steady deterioration of the price of the metal.

Platinum is the rarest of the precious metals that trade on the futures exchange. It has the highest density and is the most resistant to heat which creates a myriad of industrial application. However, platinum continues to be the dog no one in their right mind wants to adopt as the price action makes it a pariah when it comes to value.

Weak versus gold since 2014

Market participants used to call platinum "rich man's gold." Aside from the sexist connotation of the nickname, platinum has been anything but rich-person's gold since it fell to a discount to the yellow metal in late 2014 and never looked back.

Source: CQG

The monthly chart of the price of nearby NYMEX platinum futures minus nearby COMEX gold futures shows that the price spent many years at a premium to the yellow metal. In 2015, it fell to a new all-time low against gold at below $200 under its precious cousin. The price of an ounce of platinum continued to deteriorate and seems to make a new record on the downside each month as it trades at a price that is over $500 below an ounce of gold.

Weak versus palladium since 2017

Platinum's closest relative in the precious metals sector is palladium as both have similar characteristics and are members of the same group of elements. From 2003 through 2014, an ounce of platinum was more than $500 more expensive than an ounce of palladium. In 2008, the premium reached a record peak at over $1600 per ounce.

Source: CQG

As the chart displays, in 2017 platinum slipped to a discount to palladium. In 2018, the discount reached a record level below the 2001 low at a discount of around $345 per ounce. As of February 8, an ounce of palladium now costs almost $570 more than an ounce of platinum. The record lows against both gold and palladium are signs of just how ugly platinum is these days and why investors are avoiding the metal like the plague.

Even Rhodium has soared

Rhodium is another platinum group metal, but it does not trade on any futures market. Rhodium is a rare metal that is a byproduct of platinum production. The low price level of platinum caused many producers in South Africa to cut back on output as the price of the metal is below the total cost of production these days. Most of the world's platinum group metals come from primary production in South Africa and as a byproduct of nickel production in Russia.

Less platinum production caused a shortage of rhodium which has sent the price higher. Palladium recently reached a new record peak at almost $1400 per ounce. However, rhodium is a thinly traded metal, and it remains well below its record high level at over $10,000 per ounce. However, since 2016, the price performance of rhodium has been impressive.

Source: Kitco

As the chart shows, the price of rhodium has moved from below $600 to the $2500 per ounce level since 2016. Over the same period, the price of palladium moved from $451.50 to almost $1400 per pound. Both metals remain not far off their recent highs. Meanwhile, platinum's low in early 2016 was at $812.20 per ounce, and as of Friday, February 8, the price settled just over $800 per ounce.

PPLT on all dips for the long term

Most investors would not touch platinum with a ten-foot pole these days, but considering some facts, it may be just a matter of time until this dog has its day in the bullish sun. Platinum has many of the same physical characteristics as palladium and rhodium making the metal an acceptable substitute for the other two metals. Platinum is both denser and has a higher melting and boiling point than the other two metals. Industrial consumers looking to save some money can buy platinum at $570 below palladium and around $1700 per ounce cheaper than rhodium as of February 8.

Central banks hold gold as a reserve asset because of its long history as a rare investment metal. Platinum also has a history as a financial asset. Annual gold output is around three thousand metric tons while platinum production less than ten times that level. Central banks hold more than 38,000 tons of gold which is a substantial percentage of all of the gold ever mined in the history of the world. If any central banks decide to swap even a tiny portion of their gold holdings for platinum, the price will soar in the blink of an eye. China and Russia have been net buyers of gold to increase their reserves over the past decade. Given the price differential between gold and platinum, the latter offers a much more attractive value proposition to long-term holders.

I believe that the investment and industrial worlds will eventually wake up to the fact that platinum offers incredible value at its current price level, and perhaps even at much higher levels. I will continue to be a buyer of the Aberdeen Standard Physical Platinum Shares ETF product. The fund summary for PPLT states:

The investment seeks to reflect the performance of the price of physical platinum, less the expenses of the Trust's operations. The fund designed for investors who want a cost-effective and convenient way to invest in platinum with minimal credit risk. Advantages of investing in the Shares include Ease and Flexibility of Investment, Expenses, Minimal Credit Risk.

PPLT holds all of its $540.3 million in net assets in physical platinum bullion. The ETF trades an average of 76,391 shares each day.

Source: Barchart

At $75.69 per share on February 8, PPLT is trading just above its record low at $71.92 in mid-August of last year.

I continue to believe that one day platinum will shock the market and take off to the upside just like palladium has since 2016. I have been dead wrong about the prospects for the platinum market over the past years but continue to be patient as this market requires an unprecedented level of fortitude when it comes to sitting on the metal as an investment asset.

Analyst’s 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.

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.