Platinum Is Not The Rich-Person's Gold

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About: Aberdeen Standard Physical Platinum Shares ETF (PPLT), Includes: CEF, DBP, GLTR, PLTM, PTM, SPPP
by: Andrew Hecht
Summary

Price failure is getting annoying.

Rare, but investors need to care.

Gold is the rich-person's gold.

Palladium and rhodium make no difference.

A dead metal or a volcano?

On Friday, June 7, the price of gold futures rose to their highest price in 2019. Meanwhile, nearby platinum futures closed last week at $806.10 per ounce, over $100 per ounce lower than the peak for this year which came in April. On Tuesday, June 11, the price was slightly higher at the $812.50 level. Platinum is a rare metal that shares some characteristics with gold. Both are metals with industrial applications, both are prominent in jewelry, and platinum and gold have a history as financial assets.

Platinum is a rarer metal than gold, as there is over ten times the amount of gold output from the world's mines each year. Gold production comes from all over the world, while the bulk of the primary production of platinum comes from South Africa and byproduct output from Russia. After earning the nickname, "the rich-person's gold" as it traded at a higher price than the yellow metal for many years, platinum lost that moniker. Since 2014, the price of platinum has been less expensive than gold on a per ounce basis. Last week, it slipped to a $540 discount to the yellow metal which was an all-time modern-day low.

The value proposition for platinum remains compelling, but the metal has done little to inspire potential investors when it comes to the price action. The Aberdeen Standard Physical Platinum Shares ETF product (PPLT) and the Granite Shares Platinum Trust (PLTM) both hold 100% of their assets in physical platinum bullion. PPLT reflects the price action of one-tenth of an ounce of the metal, while PLTM represents one-one-hundredth.

Price failure is getting annoying

After trading to a high at just over the $900 per ounce level in late April, platinum failed again and was trading at just above $810 on Tuesday, June 11.

Source: CQG

As the weekly chart highlights, platinum shed around $100 per ounce since the week of April 22. Price failure in the platinum market has been the norm since 2008 when the price rose to the all-time modern-day peak at $2308.80 per ounce. Platinum reached the high in March 2008, and by October the price fell to a low at $761.80. After a recovery to over $1900 in 2011, each rally has led to failure. The weekly chart displays oversold conditions in both the price momentum and relative strength indicators. Weekly historical volatility declined from around 22% in late April to the 14.41% level as of June 11. The measure of price variance is a sign that platinum has become accustomed to failure. At the same time, the open interest metric in the futures market has been rising as the price declined, moving from under the 75,000-contract level in April to over 86,500 at the beginning of this week. While increasing open interest and falling price is typically a technical validation of a bearish trend in a futures market, it could be a sign that some bargain hunters are purchasing platinum when the price dips.

Rare, but investors need to care

Buying platinum when the price probes below the $800 per ounce level and taking profits on rallies has been the optimal strategy for approaching the platinum market since August 2018 when the price fell to its lowest level since late 2003 at $755.70 per ounce. However, investors have not come back to the platinum market as many likely have a sour taste in their mouths when it comes to the investment potential of the metal.

Traders and investors tend to remember their worst losses, and in 2008, the platinum market handed anyone holding a long position with a memorable experience. The decline from over $2300 to under $800 per ounce over only seven months amounted to price carnage. When it comes to platinum's position as a financial asset, gold has a lot more to offer because of both price performance and liquidity. For the platinum market to come roaring back and reflect its rarity, sentiment needs to change, investors need to care, and so far, that is not happening.

Gold is the rich-person's gold

Platinum officially lost its nickname, "the rich-person's gold" given the price performance for over one decade. Meanwhile, platinum traded to over a $1000 per ounce premium to gold in 2008, and historically commanded a premium to the yellow metal Since 2014, platinum is no longer for rich people, as its price has been lower than its precious cousin.

Source: CQG

The chart of the price of July platinum minus August gold shows that last week, the differential slipped to a new record low at a $540 discount for platinum under gold. At $517.20 cheaper than the yellow metal on June 11, platinum remains under siege in the precious metals sector. Before 2015, platinum never traded below a $175 discount to gold, and since then, it has not traded above. Gold is not the only metal that has dominated platinum, the price performance of the other two most popular platinum group metals have relegated platinum to the position of the red-headed step-child of the PGM market.

Palladium and rhodium make no difference

Platinum is a denser metal with a higher melting and boiling point than both palladium and rhodium. The output of the three PGMs comes from South Africa and Russia. In Russia, the metals are byproducts of nickel production. In South Africa, where there is primary production, rhodium is a byproduct of extracting platinum from the crust of the earth. The low price of platinum caused some South African mines to cut back on higher cost production by closing some veins in mines. The move created a shortage of rhodium, causing the price to move significantly higher since 2016.

At the start of 2016, platinum traded to a low at $812.20 per ounce, palladium fell to a bottom at $451.50, and the price of rhodium was around the $600 per ounce level. On Tuesday, June 11, nearby platinum futures on NYMEX settled at $812.50 per ounce, only 30 cents above the early 2016 bottom. The price of the active month September palladium futures on NYMEX was at $1380 on the same day, over triple the price in early 2016. Rhodium, which only trades in the physical market, was at a midpoint of $2795 per ounce on June 10, over 4.5 times the price at the start of 2016. Compared to gold, palladium, and rhodium, platinum continues to be a dog with fleas, and the repeated price failure has shaken the will of even the most committed investors and traders waiting patiently for the metal to reflect its fundamentals.

A dead metal or a volcano?

Platinum's history as both an industrial and financial metal has been shaken to its core by its price performance. Annual production of platinum is over ten times less than gold. If platinum still has a role as a financial asset, it is a rarer metal than gold which commands an over $500 premium to the rare metal. Platinum is denser than palladium and rhodium and can be a substitute for each metal when it comes to industrial applications. At over at $560 discount to palladium and an almost $2000 discount to rhodium, the demand for platinum should be rising. However, it is not.

Platinum is a dead metal at just over $810 per ounce. With a poor history as an investment that has left holders with more than a few tears and an addressable market of industrial users who have not substituted palladium and rhodium requirements with platinum, the price of the metal continues to languish. Anyone who has held platinum since it reached its most recent peak in 2011 at just over $1900 per ounce has watched as each attempt at a rally failed. The latest move to above the $900 level in April was another repeat performance.

In the world of commodities, I have found that the most challenging positions often turn into the most rewarding. It is hard to argue with platinum's value proposition compared to the price action in the other precious metals. However, it is also hard to argue with the metal's performance, which should put it on probation as a precious metal at best and expel it from the sector at worst.

Faber College expelled John Blutarsky in the movie "Animal House" for a zero point zero, zero grade point average. Platinum is the Bluto of the precious metals sector. However, Bluto became Senator Blutarsky, so there is hope for the forlorn metal. On the other hand, John Belushi, the actor, and comedian who played Bluto in the movie died years ago, and so has platinum.

Platinum is cheap, but it is ugly. Platinum offers the best value proposition in the precious metals sector, but it is a dog. Platinum will come back one day, but it is the most frustrating position of all my holdings. I am a committed platinum investor, and time will tell if I should just be committed for misreading the fundamentals of this metal.

The most direct route for investment in platinum is via the coins and bars offered by precious metals dealers around the world. The NYMEX futures contracts in platinum provide a physical delivery mechanism for the metal. For those who do not wish to hold physical platinum or venture into the futures arena, the Aberdeen Standard Physical Platinum Shares ETF product and the Granite Shares Platinum Trust both hold 100% of their assets in physical platinum bullion. Both products replicate 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 $530.74 million and trades an average of 78,037 shares each day. PPLT charges an expense ratio of 0.60% and each share represents one-tenth of an ounce of the metal.

Then 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 much smaller than PPLT with only $3.54 million in net assets and an average of 6,348 shares changing hands each day. However, PLTM charges a lower expense ratio of 0.50% and each share represents a position in 1/100 of an ounce of platinum.

Platinum is far from the rich-person's gold these days, and the price action continues to be uninspiring. However, I continue to believe that the metal offers one of the most attractive value propositions in the entire commodities asset class, and I will continue to add to long positions on price weakness.

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 and is a fan of the movie Animal House