Platinum Is The World's Most Frustrating Precious Metal
- A correction in the precious metals sector.
- Gold and silver hit speed bumps.
- Palladium and rhodium correct.
- Platinum loves to tanks.
- One day this metal will shock the world - PLTM is a physical ETF product.
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Platinum is a rare metal. The overwhelming bulk of annual production comes from two countries, South Africa and Russia. In South Africa, the output comes from primary production in mines that are deep in the crust of the earth. In Russia, platinum and other platinum group metals are byproducts of nickel output in the Norilsk region of Siberia.
Platinum is a hybrid like gold and silver. Its density and resistance to heat give platinum substantial industrial applications. At the same time, the metal formally "rich person's gold" has a reputation as a store of value and an investment vehicle. However, platinum has done its utmost to destroy that reputation since 2014, the year that it slipped to a discount to gold and never looked back.
Platinum underperformed other precious metals on both the upside and downside, making it the red-headed stepchild of the sector. Over recent sessions, platinum continued to take any excuse to refuse to hand believers in the value of the metal any reward. Platinum had a horrible week when risk-off hit the precious metals sector during the final week of February 2020. When gold and silver recovered on the first trading session of March, platinum posted a loss. I believe in platinum, but the metal takes every opportunity to make me look like a dope. The GraniteShares Platinum Trust (NYSEARCA:PLTM) replicates the price action in the platinum market, which was disappointing since mid-January when platinum failed at the highest price since early 2017.
A correction in the precious metals sector
The final week of February began with a sudden push higher in the precious metals arena. Gold rose to a new high of $1691.70 on the active month April futures contract on Monday, February 24. Silver briefly probed above $19 on the May contract. Platinum was still within striking distance of the $1000 level. Palladium and rhodium prices have been in the stratosphere throughout 2020 with palladium reaching $2815.50 in late February and rhodium moving to the $12,000 per ounce level, both new record levels for the platinum group metals.
On Monday, February 24, risk-off conditions hit markets across all asset classes like a ton of bricks. The stock market fell throughout the final week of the month. Markets across all asset classes followed as only US government bonds and markets that had a significant short interest, like the euro currency, moved higher. During risk-off periods, market participants move to the sidelines. In a sign that some investors were holding long positions in platinum, the price of the rare precious metal tanked.
Precious metals were the best performing sector of the commodities market in 2019, and price strength continued into 2020. The final week of February became an ugly period as weaker longs abandoned risk positions and scrambled to the sidelines.
Gold and silver hit speed bumps
Gold had been shining brightly, and on Monday, February 24, the yellow metal rose to another in a series of higher highs since it broke out to the upside in June 2019.
The daily chart shows that April gold futures fell from $1691.70 on February 24 to a low of $1564 on Friday, February 28, or 7.5%. Open interest declined as weak longs scrambled for an exit to risk positions during risk-off conditions in markets across all asset classes.
Silver did even worse than gold during the final week of February, falling from $19.005 on the May contract to a low of $16.40 over the same period, a decline of 13.7%. The total number of open long and short positions fell sharply as longs liquidated risk positions.
Gold and silver hit speedbumps at the end of February, but they came roaring back during the first two sessions of March. A 50-basis point rate cut turbocharged a recovery sending gold back to above the $1660 level on March 5 and silver to over $17.30 per ounce on the nearby futures contract. At those levels, gold moved 6.1% and silver 5.5% higher from the February 28 lows.
Palladium and rhodium correct
The bull market in palladium and rhodium has been nothing short of spectacular. However, both metals were not immune to the risk-off environment that gripped markets at the end of February.
The chart of June palladium futures shows that the price of the volatile metal fell from $2789.80 on February 27 to a low of $2322.10 on March 4 or 16.8%.
The price of rhodium, which was offered at above the $12,000 level in February fell to just over the $10,000 per ounce level. Rhodium does not trade on the futures market and suffers from limited liquidity. The leader of the platinum group metals, platinum, continued to be the worst-performing precious metal of all.
Platinum loves to tanks
To call platinum a dog after the recent price action would be an insult to our canine friends. Platinum has been a laggard for over half a decade, and the risk-off period in markets did nothing to change its mangy performance.
While gold and silver initially attracted buying on February 24 as risk-off conditions gripped the stock market, platinum began declining from a lower high on February 19. The price fell from $1021 on the nearby NYMEX April futures contract to a low of $846.20 on Friday, February 28, a decline of 17.1% making platinum the worst performing precious metal. The open interest metric shows that the total number of open long and short positions dropped from over 103,000 contracts on February 19 to just over 81,500 on March 4. Those holding long positions in platinum have experienced pain since 2014, and they received another dose over the past two weeks. Gold and silver prices bounced by 6.1% and 5.5% as of March 5, but platinum at the $862 level was only 1.9% off the low. At $1660, gold is trading at over $610 above its late 2015 low. Silver at $17.30 was over $3.60 above its bottom from December 2015. Palladium at $2440 was almost $1990 above its early 2016 bottom, and rhodium at $10,000 was $9,425 per ounce higher than its low from 2016. At $860, the dog of the sector was less than $50 higher than its January 2016 low.
Platinum's pattern of underperformance reared its ugly head once again during the recent period of risk-off conditions in markets.
One day this metal will shock the world - PLTM is a physical ETF product
Platinum is rare; it has a history as a financial asset that is a store of value. Platinum has a myriad of industrial applications and can be a substitute for the other high-flying platinum group metals. However, platinum is a dog and not an obedient pooch. The most recent group of buyers followed the metal back into the pound and put their positions to sleep as the open interest metric declined by around 21,700 contracts since February 19.
Every dog has its day. When platinum's day finally arrives, it will have done so much damage to anyone brave, or stupid enough, to hold the metal that the price could soar. I like to buy platinum on price weakness, and lord knows, the metal has given me plenty of opportunities over the past years. The price action during the final days of February was just another disappointment for the world's most frustrating metal.
The most direct route for a risk position in platinum is via the physical market or bars and coins or the futures market on the NYMEX division of the CME that provides a mechanism for physical delivery. The GraniteShares Platinum Trust offers an alternative as each share replicates the price action of one one-hundredth of an ounce of the metal. The top holding of PLTM include:
Source: Yahoo Finance
Since PLTM holds 100% of its net assets of $11.2 million in physical platinum, the ETF does an excellent job replicating the price action in the metal. The ETF trades an average of 28,654 shares each day and charges a 0.50% expense ratio, which is ten basis points lower than the other platinum ETF product, PPLT, which reflects the price action of one-tenth of an ounce of the precious metal.
The last significant rally in the platinum market took the price of April futures from $874.00 on November 12 to $1046.70 on January 16, a rise of 19.8%.
Over the same period, PLTM moved from $8.59 to $10.21 or 18.9%.
PLTM tracks the price of platinum on the up and the downside. Platinum is a highly frustrating market for anyone that believes the market offers compelling value. Every dog may have its day, but platinum is no show dog. After the recent price action, the metal is back in the pound with a slim chance for adoption.
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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.
Andy understands the market in a way many traders can’t imagine. He’s booked vessels, armored cars, and trains to transport and store a broad range of commodities. And he’s worked directly with The United Nations and the legendary trading group Phibro.
Today, Andy remains in close contact with sources around the world and his network of traders.
“I have a vast Rolodex of information in my head… so many bull and bear markets. When something happens, I don’t have to think. I just react. History does tend to repeat itself over and over.”
His friends and mentors include highly regarded energy and precious metals traders, supply line specialists and international shipping companies that give him vast insight into the market.
Andy’s writing and analysis are on many market-based websites including CQG. Andy lectures at colleges and Universities. He also contributes to Traders Magazine. He consults for companies involved in producing and consuming commodities. Andy’s first book How to Make Money with Commodities, published by McGraw-Hill was released in 2013 and has received excellent reviews. Andy held a Series 3 and Series 30 license from the National Futures Association and a collaborator and strategist with hedge funds. Andy is the commodity expert for the website about.com and blogs on his own site dynamiccommodities.com. He is a frequent contributor on Stock News- https://stocknews.com/authors/?author=andrew-hecht
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. The author is long platinum
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