Platinum Fails Again: A Higher Low And Another Chance On The Horizon

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About: Aberdeen Standard Physical Platinum Shares ETF (PPLT), Includes: AAAU, AGQ, BAR, CEF, DBP, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GHS, GLD, GLDI, GLDM, GLDW, GLL, GLTR, IAU, IAUF, JJP-OLD, OUNZ, PALL, PGM-OLD, PHYS, PLTM, PSLV, PTM, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, SPPP, UBG, UGL, UGLD, USLV, USV, ZSL
by: Andrew Hecht
Summary

Platinum displayed some signs of life.

The second best of the four traded precious metals.

Three compelling reasons that support platinum.

Buy futures and take delivery.

Two platinum ETFs that replicate the price.

The price of platinum has had a long habit of failing on price rallies. After reaching a peak at $920.40 per ounce on the active month July futures contract on April 8, the price backed off along with other precious metals as the dollar index moved to a new high, the Fed dispelled any hopes of an interest rate cut, and concerns over the trade dispute with China increased as optimism for a deal declined.

The price of platinum was trading at the $865 per ounce level on Friday, May 10 which was $55.40 below the recent high on the July contract while it was still over $80 per ounce above the mid-August low which was the lowest price for the precious metal since 2003. I continue to believe that platinum offers the best value proposition in the precious metals sector at its current price level. The most direct route for any investment in the metal is via the physical market through coins and bars made of solid platinum metal. The futures market has a delivery mechanism, so it is the second most direct way to place a bet on platinum on the long side. For those who wish to hold instruments that replicate the price action in the platinum market but do not want to hold physical metal or venture into the futures arena, the Aberdeen Standard Physical Platinum Shares ETF product (PPLT) or the Granite Shares Platinum Trust (PLTM) provide alternatives.

Platinum displayed some signs of life

After falling to the lowest price since late 2003 in mid-August 2018 at $755.70 per ounce, platinum has made higher lows and higher highs. In 2003, precious metals and many other commodities were at significantly lower levels. Gold was trading under $420 per ounce. The price of silver was lower than $6.03 while the high in palladium was $275 per ounce. Crude oil traded at a high at $39.99 per barrel that year, and copper’s peak was at $1.0510 per pound to put the price of platinum last summer in perspective. Since last August, the platinum market has been attempting to recover.

Source: CQG

As the weekly chart shows, the price continues to be in a bullish trend despite the recent selling that took the price of platinum back down to just below the $850 per ounce level. Platinum traded to a high at $907.90 on the continuous contract, and $920.40 on the active month July futures contract before the recent corrective move. Platinum continues to display some signs of life on the upside, but it needs to hold the recent low for the technical pattern to continue. The weekly pictorial shows that a move above the $1022.60 per ounce technical resistance at the January 2018 high is necessary for a breakout to the upside where the price can play catchup with the other Platinum Group Metals like palladium and rhodium.

The second best of the four traded precious metals

Since the end of 2018, platinum is the second-best performer of the precious metals that trade on the COMEX and NYMEX divisions of the Chicago Mercantile Exchange. The laggard, a role that platinum embraced for quite some time, has been silver which is 4.83% lower as of the close of business on May 10 as the price moved from $15.54 at the end of last year to settle at $14.79 on Friday. The price of gold has hardly moved in 2019, and while it is 0.2% higher, it only moved from $1284.70 to $1287.40 as of last Friday.

Palladium has been the big winner once again; a position it holds since early 2016 when the price took off from $451.50 per ounce. Palladium closed 2018 at $1197.50 and was at $1350.70 on May 10, 12.8% higher so far this year. Palladium has been highly volatile. The price traded to a high at $1599.10 in March. Second place this year goes to platinum which is 9.8% higher this year moving from $788.50 on December 31 to $865.50 at the close of business last Friday. Platinum is doing a lot better this year, but the price of the metal is still at a depressed level compared to the other three rare metals which could mean there is a lot more upside on the horizon for the platinum market.

Three compelling reasons that support platinum

The three compelling reasons that support platinum are location, rarity, and substitutability. Platinum comes from two countries in the world; South Africa and Russia. In South Africa, the low price of the metal has caused some producers to close off higher cost output as the platinum ore is typically found deep in the crust of the earth. The rise in the price of rhodium which has moved from under $600 in 2016 to almost $3000 per ounce is because of a shortage created as the metal is a byproduct of platinum production. In Russia, platinum is a byproduct of nickel output.

Platinum production is around 250 tons per year which means it is over thirteen times rarer than gold. In 2018, gold production around the world was 3,346.9 tons (Source- the World Gold Council). Platinum’s nickname was “rich man’s gold” in the past because it typically commanded a premium to the price of the yellow metal. As of the close of business last Friday, platinum was trading at a $420 per ounce discount to gold. Finally, platinum can be a substitute to gold from an investment basis and more significantly to palladium and rhodium when it comes to industrial applications. For those reasons alone, platinum at its current price level is dirt cheap at $865.60 per ounce.

Buy futures and take delivery

The most direct route for investment in platinum is via the physical market where dealers around the globe offer bars and coins made of pure platinum metal. However, because of the rarity of the metal, the ingots and numismatics often command substantial premiums to the spot price of platinum. One solution for those looking to purchase platinum and avoid the premium is to buy the nearby platinum futures contract on the NYMEX exchange and stand for delivery. While there are some charges for taking the metal off warrant, they are likely to be lower on a per ounce basis than purchasing through a dealer. A contract of platinum contains approximately 50 ounces which at Friday’s closing price has a total value of $43,280.

For those who do not want to hold the physical metal or venture into the futures arena, two products provide an alternative.

Two platinum ETFs that replicate the price

The Aberdeen Standard Physical Platinum Shares ETF product (PPLT) and the Granite Shares Platinum Trust (PLTM) do an excellent job replicating the price action in the platinum market. 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 has net assets of $588.39 million and trades an average of 88,320 shares each day. The price of platinum moved from $755.70 in mid-August to settle at $865.60 on May 10, a rise of 14.5%.

Source: CQG

As the chart shows, over the same period, PPLT moved from $71.92 to $81.78 or 13.7%. The difference is like the cost of storing the metal and the fees associated with the ETF product. PPLT reflects the price action on 1/10 of an ounce of platinum.

The fund summary for PLTM states:

The investment seeks to reflect, at any given time, the value of the assets owned by the Trust at that time less the Trusts accrued expenses and liabilities as of that time. The Shares are intended to constitute a simple and cost-effective means of making an investment similar to an investment in platinum. An investment in allocated physical platinum bullion requires expensive and sometimes complicated arrangements in connection with the assay, transportation and warehousing of the metal. It is non-diversified.

PLTM is a newer product, so it has smaller net assets of around $4 million and trades an average of 5,066 shares each day.

Source: CQG

Over the same period, the price of PLTM rose from $7.55 to $8.59 or 13.8%. PLTM outperformed PPLT because its expense ratio is 0.10% lower. PLTM reflects the price action of 1/100 of an ounce of platinum. Both PPLT and PLTM hold physical platinum bullion.

An investment in platinum via the physical, futures, or ETF markets offers compelling value compared to the prices of all other precious metals at their current levels. I view the recent fall to under $900 per ounce not as a failure, but as an opportunity to buy more of the rare metal that offers one of the best value propositions of all commodity products.

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.

The author owns platinum