PLTM Weekly: Platinum's Weak Fundamental Backdrop Exposed

Summary

• PLTM experienced its worst performance (-12%) last week since its inception date in February 2018.
• This came amid a broad-based sell-off across the precious metals space, triggered by a contraction in safe-haven demand after Fed Chair Powell insinuated a possible dovish Fed's response.
• Last week’s contraction in safe-haven demand revealed platinum’s weak fundamental backdrop.
• While our bullish view on PLTM remains unchanged for March, we have revised slightly lower our Mar-20 target to $9.50 per share (from $9.90 previously) to mark to market our forecasts.

Thesis

Welcome to Orchid's Platinum Weekly report, in which we discuss platinum prices through the lenses of the GraniteShares Platinum Trust (NYSEARCA:PLTM).

PLTM experienced its worst performance (-12%) last week since its inception date in February 2018. This came amid a broad-based huge sell-off across the precious metals space, triggered by a contraction in safe-haven demand after Fed Chair Powell insinuated a possible dovish Fed's response after the catastrophic sell-off in the US equity market.

Like gold and silver, we think that platinum could come under further downward pressure in the immediate term in case of a further stabilization in risk sentiment. However, the deterioration in the US economic outlook, combined with a likely Fed rate cut in March, is likely to stimulate monetary demand for platinum, which should push PLTM higher.

While our bullish view on PLTM remains unchanged for March, we have revised slightly lower our Mar-20 target to $9.50 per share (from $9.90 previously) to mark to market our forecasts.

Source: Trading View, Orchid Research

About PLTM

PLTM, which was created in January 2018, is directly impacted by the fluctuations of platinum spot prices because the Funds physically holds platinum bars in a London vault and custodied by ICBC Standard Bank.

The investment objective of the GraniteShares Platinum Trust is to replicate the performance of the price of platinum, less trust expenses (0.50%), according to the official Graniteshares’ website.

The physically-backed methodology prevents investors from getting hurt by the contango structure of the platinum market, contrary to ETFs using futures contracts.

Also, the structure of a grantor trust protects investors since trustees cannot lend the platinum bars.

PLTM is the lowest-cost ETF on the market, with an expense ratio of 0.50%. PLTM competes with the Aberdeen Standard Physical Platinum Shares ETF (PPLT), which was created in October 2010, which is however more expensive considering that its expense ratio is at 0.60%.

Speculative positioning

Source: CFTC, Orchid Research

The speculative community slashed its net long position in Nymex platinum at the largest pace since December 2017 in the week to February 25. Speculators reduced their net spec length by the equivalent of 571 koz thereafter over February 18-25, which represents 12% of open interest or 7% of annual supply. This is significant. Yet, the Nymex platinum spot price dropped “only” by 2.0% over February 18-25, which could imply some offsetting OTC buying activity.

We are not surprised by the recent wave of speculative selling. As we noted in our previous update:

Because platinum’s spec positioning is heavily long, the risk of a further unwinding cannot be ruled out. The net spec length is at 60% of open interest, which is quite close to its historical high of 74% of OI.

While platinum’s spec positioning is lighter than a week ago, a further degrossing cannot be ruled out in the very short term since the net spec length is at 51% of open interest, not remarkably below its historical high of 74% of open interest established in September 2018.

Implications for PLTM: Because a further degrossing of platinum’s long positioning cannot be ruled out in the immediate term, the Nymex platinum spot price could come under pressure, which, in turn, could push PLTM lower.

Investment positioning

Source: Orchid Research

ETF investors sold platinum at a rate of 6 koz in the week to February 28, marking the third straight week of net outflows. The Nymex platinum spot price tumbled 11% over February 14-21.

Unlike gold, the sell-off in platinum prices did not elicit some buying on the dips from ETF investors. This reflects a cautious sentiment among platinum ETF investors, who are likely too positioned in the market after building substantial positions in 2019.

Having said that, we continue to argue that platinum is an attractive alternative safe-haven, evident in its tightly positive co-movement with gold.

Implications for PLTM: We continue to expect healthy ETF demand for platinum in 2020, which should underpin the uptrend in the Nymex platinum spot price and thus PLTM this year.

Last week’s contraction in safe-haven demand revealed platinum’s weak fundamental backdrop

Source: Bloomberg, Orchid Research

Platinum was the worst performer among the precious metals last week. While the broad-based sell-off in the precious metals was of macro nature, platinum’s underperformance vs its peers highlighted the weakness of its fundamental backdrop (ex-investment).

Although the platinum was in a deficit of 203 koz in 2019 (according to Johnson Matthey), this was only due to an abnormally large increase in investment demand. Johnson Matthey estimates that investment demand for platinum totaled 1.34 million oz last year, a record high. Without it, the platinum market would have remained in a structural surplus since all other sectors (auto, industry, jewelry) experienced contractions in consumption.

Implications for PLTM: In case of a further contraction in safe-haven demand (likely in the very near term), platinum is the most vulnerable on the downside. However, we view the recent sell-off as a buying opportunity over the long term.

Closing thoughts

The magnitude of the sell-off in PLTM last week took us by surprise, like many market observers. Yet, it exposed the weakness of the fundamental backdrop of the platinum market once investment demand vanishes.

Given the return to risk-taking appetite on dovish Fed expectations, we argue that a further degrossing of platinum’s spec positioning and additional ETF outflows cannot be ruled out in the immediate term, which should, in turn, pressure PLTM lower.

However, any additional weakness in PLTM in March should prove a buying opportunity in the long term because the forthcoming dovish Fed response to the deterioration of the US economic outlook caused by the Covid-19 outbreak should ultimately stimulate safe-haven demand for platinum.

Our Mar-20 target for PLTM is at $9.50 per share.

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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.

Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.