PLTM Weekly: PLTM Is Too Cheap Vs. The Dollar
Summary
- PLTM has rebounded strongly from its March low, which comes in line with our expectations.
- Our Q2-20 high target of $9 per share may prove a bit too optimistic considering the recent consolidation in the precious metals space.
- We think that a positive shift in sentiment has emerged in favor of platinum, which should result in an outperformance of platinum as it plays catch up with its peers.
- We present a chart showing that platinum looks undervalued compared to the dollar index, which suggests more upside pressure in the near term.
- Our Q3-20 target for PLTM is at $10 per share, implying a 21% from its current level.
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 has rebounded strongly from its March low, which comes in line with our expectations.
Our Q2-20 high target of $9 per share may prove a bit too optimistic considering the recent consolidation in the precious metals space.
However, we think that a positive shift in sentiment has emerged in favor of platinum, which should result in an outperformance of platinum as it plays catch up with its peers.
We think that PLTM is too cheap based on the dollar index, which suggests more upside pressure in the near term.
Our Q3-20 target for PLTM is at $10 per share, implying a 21% from its current level.
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 by the equivalent of 72 koz its net long position in NYMEX platinum in the week to June 2, according to the CFTC. This was the first weekly decline in the net spec length in three weeks.
Nevertheless, we continue to think that a positive shift in speculative sentiment toward platinum has occurred since May.
At 41% of open interest, the net spec length is well below its all-time high of 74% of open interest, meaning there is plenty of room for additional speculative buying in the months ahead.
Implications for PLTM: We expect speculative buying for platinum in the near term, which should push the NYMEX platinum price higher, thereby exerting upward pressure on PLTM.
Investment positioning
Source: Orchid Research
ETF investors bought platinum to the tune of 20 koz in the week to June 5, according to our estimates.
This was the third straight week of inflows.
This reinforces our view that a positive shift in investor sentiment has emerged in favor of platinum.
ETF investors seem to have underestimated the safe-haven characteristics of platinum. Given its marked underperformance since the start of the year, ETF investors could express renewed buying interest for the beaten-down precious metal.
We think that platinum offers a great value proposition over the very long term. ETF investors who have liquidated their positions seem to adopt a too short-term investment horizon and miss the super long-term big picture. Yes, the platinum market is likely to post a large surplus this year but a deficit may start emerging in the coming years. This will ultimately lead to higher prices.
Platinum ETF holdings have dropped by 174 koz or 6% since the start of the year.
Implications for PLTM: We see a further increase in investment demand for platinum in the months ahead, which should result in firmer platinum prices and thus a stronger PLTM.
Platinum looks too cheap vs the dollar
The massive policy support from the Fed has prompted investors to re-leverage their portfolios with a vengeance, leading to a marked decline in the dollar.
Given the negative co-movement between the platinum price and the dollar index, it is logical to expect a firmer platinum price based on a weaker dollar.
But as the chart below, the dollar has weakened at a stronger pace than the NYMEX platinum price has appreciated. From this standpoint, platinum looks too cheap and a catch-up could occur in the near term.
Source: Bloomberg, Orchid Research
Implications for PLTM: The marked decline in the dollar index should pressure NYMEX platinum further higher, thereby exerting upward pressure on PLTM.
Closing thoughts
PLTM has rebounded strongly since the start of June (+9%), corroborating our constructive view on platinum.
We believe that a positive shift in sentiment has emerged among financial players, which should result in an outperformance of platinum in the months ahead because platinum plays catch up with the rest of its complex after being beaten down in Q1.
However, we contend that the fundamentals are in a bearish posture and that renewed weakness could occur in Q4 when the negative seasonality hits platinum prices.
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