The precious metal space has been stressed for much of 2013 as investors shunned safe haven investments for high growth equities backed by the surging financial markets and Fed tapering concerns.
While gold and silver remain the favorites of investors, the most popular white metal – platinum – is gaining increased traction of late. In fact, platinum has outperformed its two cousins – gold and silver – so far this year. The price of platinum has fallen 8.4% in the year-to-date time frame compared to losses of 24% for gold and 33% for silver (read: Silver ETFs Stumble, Fresh Lows Next?).
Platinum is one of the rarest precious metals on the earth and is often overlooked by investors. It could be considered an extremely lucrative investment avenue given demand/supply dynamics that would lead to higher prices for platinum heading toward the next year.
A precious metal refiner, Johnson Matthey, predicts that the platinum market would be in the biggest supply deficit in 14 years. The demand for platinum is expected to increase 4.9% year over year to a record, buoyed by strong industrial and South African issues. Plus, supplies look to fall short of demand by 605,000 ounces, far worse than the previous period which showed a shortfall of 340,000 ounces.
Supply Falling Gradually
About 80% of the total supply comes from South Africa, which is struggling with labor problems and mine closures resulting in frequent supply disruptions.
Currently, Northam Platinum, the world’s fifth largest platinum producer, is in its third week of strikes due to disputes over wage negotiations. The other top three producers – Anglo American Platinum, Impala Platinum and Lonmin – might also have to suspend operations as mineworkers are demanding higher pay and managers are looking to keep a lid on rising costs.
Supplies from Russia, the second largest supplier, have also been declining (read: Russia ETFs: Immune to Emerging Market Weakness?).
Demand Growing Rapidly
The automotive industry, mainly via catalytic converters for vehicles, is a big driver of demand in the platinum market, accounting for nearly 40% of the total. A solid rebound in the auto industry, new vehicle emissions standards in Europe and continued growth in Chinese auto sales may continue to boost demand for metal (read: These 3 ETFs Could Soar on Strong Car Sales).
About 35% of the total metal demand comes from jewelry whereas demand from industrial applications accounts for 20%. China, Europe, North America and India are seeing robust demand too.
In addition, the construction of new facilities in Asia and the Middle East chemical sector and the manufacture of glass and computer hard disks would propel the purchase of platinum catalysts going forward.
The rest of the demand is driven by investments, which are expected to grow 68% this year thanks to South Africa’s new platinum-backed exchange-traded product.
How to Play?
Investors thinking to tap this deficit platinum market condition along with rising demand could find any of the following three ETFs an intriguing choice. The trio has a Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting that the products would outperform in the coming months. Let us discuss them in greater detail below (see: all the Precious Metal ETFs here):
ETFS Physical Platinum Shares
This fund seeks to track the performance of the price of bullion platinum, before Trust expenses. With about $794 million in AUM, this is the largest and the only physically backed platinum ETP keeping platinum in plate and ingot form under the custody of JP Morgan Chase Bank in Zurich or London.
The product sees moderate volume of more than 44,000 shares a day and charges 60 bps in fees per year from investors. The ETF lost about 9% in the year-to-date time frame.
ETRACS CMCI Long Platinum Total Return ETN
This ETN tracks the CMCI Platinum TR Index, which measures the collateralized returns from a basket of platinum futures contracts. The commodity futures contracts are targeted for constant maturity of three months. The product has an expense ratio of 0.65%.
The note has amassed $31.6 million in its asset base while volume is light. PTM is down over 10% so far this year (read: Time to Buy This Precious Metal ETF?)
iPath DJ-UBS Platinum ETN
This ETN follows the Dow Jones-UBS Platinum Total Return Sub-Index, which reflects the returns from investment in platinum futures contracts and the interest that could be earned on cash collateral invested in T-Bills.
The note has been able to manage assets worth $17.6 million while volume is very light. It also has a steep expense ratio of 75 bps. The product lost nearly 11% in the year-to-date time frame.
Given strong demand and supply shortage conditions, prices for platinum are expected to go up in the coming months. Investors should definitely cycle their exposure to this precious metal space and with the Fed continuing to keep its monetary stimulus intact at least in the short term, the space may continue to get a boost.
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