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Platinum – The night is darkest before the dawn?

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ETFS Trade Idea: Platinum – The night is darkest before the dawn?

High level summary:

  • Platinum, one of the rarest precious metals, could correct upwards in H2 2018 to $900 an ounce

  • This is because the platinum supply deficit is being exacerbated by today’s low prices

  • South African politics – most platinum is mined in South Africa – has scared away mining investment, which also threatens supply

  • Demand for platinum in auto catalysts, the mainstay of the metal’s demand, has been increasing.

  • How to Invest:

o ETFS Physical Platinum (ETPMPT) is the only pure listed exposure to platinum in Australia

o MER: 0.49% p.a

In this week’s ETFS Trade idea, we look at platinum, the rarest of the precious metals, whose price has been trending downwards in recent months. We take a look at whether platinum might be oversold and how fundamentals and macro trends support a near-term price rise. We finish by looking at ways investors can gain exposure to the rare metal.

Platinum – Some background

Platinum is a very rare metal. It is estimated that all the platinum ever produced would only go ankle-height in an Olympic sized swimming pool. (World Platinum Investment Council, 2018) South Africa produces 73% of the world’s platinum and has the overwhelming majority of proven reserves. Within South Africa itself, two companies – Anglo American (Amplats) and Impala – produces almost half of supply. (Thomson Reuters, 2018)

Platinum’s unique chemical properties make it a choice element in industry. Industrial uses include electrics, medical equipment and, most importantly, catalytic converters in diesel cars, buses and trucks. Platinum is also a popular metal in jewellery due to its resistance to warping.

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A weak performance in 2018

Platinum has performed poorly in 2018, with its spot price sinking from a January peak of $1,016 per ounce to $790 as of mid-August. Year-to-date, platinum has fallen 23%, while gold has fallen roughly 10%. Taking a longer-term view, platinum’s spot price seems to have peaked – like gold, with which it correlates quite closely – in 2011 at around $1,855 per ounce.

An upward correction seems possible

While platinum’s recent performance has disappointed, some well reputed analysts believe it’s possible for prices to hit $900 in various points of H2 2018, for the following reasons:

  1. There could be some reversion to the mean in platinum’s parity in gold: at present platinum is only tracking gold on the downside and not the upside.

  2. Trends within South Africa itself are likely to support long-term a price hike. These include heightened political risks facing miners and higher utilities costs.

  3. Diesel engine production continues to rise in absolute terms, especially given strong demand in Asia. Diesel cars are not “dead” in Europe, as is sometimes implied in the press.

  4. Today’s platinum prices in the $790s are below production costs, data suggests. This means that miners will likely cut back on production, which will widen out the already existing supply deficit. We expect that the supply deficit will grow until prices bounce back.

Parity with gold likely to be restored

For most of its history platinum has traded at a premium to gold (one suspects this owes to platinum being the rarer metal). Yet at present platinum trades at a 33% discount to gold. In the current cycle, platinum has only tracked gold price falls and not its upside, widening the discount. (Gupta, 2018)

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In our view, some mean reversion in the near term is likely due to supply and demand dynamics (detailed below) but also due to renewed investor interest in response to these dynamics. As platinum correlates with gold, it offers similar portfolio diversification benefits and upside potential. (David Hillier, 2006) For this reason, we expect investor interest to rekindle as prices recover, helping stabilise demand.

South African political risk and supply cuts

South African politics is likely an additional supply side pressure. Mine nationalisations have been threatened by the Economic Freedom Fighters, (Economic Freedom Fighters, 2018) South Africa’s third-largest party, which is surging in the polls. (Umraw, 2018)

South Africa is a one-party state, with the African National Congress ruling since apartheid ended, making an EFF government unlikely. But, as is often the case in politics, the danger lies not so much in the minority party seizing power but in its a