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Time to Invest in Platinum ETFs?

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Platinum appears poised to spike in coming weeks, as supply problems in South Africa continue to escalate.

Often called “rich man’s gold”, platinum is one of the rarest metals in the world.  This metal along with others from the platinum group have important industrial applications and hence their price is determined more by economic trends than by their safe haven status. (Read: Base Metal ETFs Soar on Strong Data)

Correlation between platinum and gold has been volatile, ranging from nearly 100% to negative, but has mostly been positive, averaging about 60%. This year, they have been trading close to each other; currently platinum is trading at a slight premium to gold.

Apart from the improvement in broader global economic outlook, rising demand from auto-manufactures and supply problems in South Africa are pushing the platinum price up.

The vast majority of the world's platinum demand is driven by auto-catalyst and jewelry production, which accounted for 39% and 31% total gross demand in 2011, respectively. (Read: Is the Copper ETF Back on Track)

South African Supply in Focus

Platinum’s supplies come mainly from South Africa (~67% of total supply), while Russia is the second largest supplier. South Africa has 80% of the world’s platinum reserves. On the other hand, supplies from Russia have been declining of late.

For the past couple of years, there have been increasing labor problems in South Africa, resulting in frequent supply disruptions. Earlier this year, Anglo American Platinum, the world’s largest producer of platinum had to suspend operations for a day after labor violence at one of the mines. (Read: Natural Gas ETFs Tumble on Big Supply Gains)

Labor problems at the Anglo American mines may escalate again the company reveals the outcome of talks with the government and unions about restructuring plans that may involve cutting up to 14,000 jobs and mothballing two mines in South Africa.

Mining in South Africa is labor intensive, and continued production of the metal requires deeper mine shafts, which results in rising extraction costs. Also, recently, the National Union of Mine workers decided to ask for a double-digit rise in wages.  

According to GFMS Ltd's 2013 Platinum and Palladium Survey released last week--after seven consecutive years of gross surpluses, platinum production fell into a deficit in 2012, due to significant disruption to mine supply from South Africa. 

ETFs provide a cost effective, secure and convenient way of gaining exposure to the group of precious metals. Transaction cost for buying and selling ETF shares is usually lower than the cost of buying, storing and insuring physical precious metals.

ETFS Physical Platinum Shares (PPLT - Free Report)

Launched in January 2010, this ETF tracks the performance of platinum’s price, less expenses. The shares are issued by ETFS Platinum Trust, which holds physical platinum bullion bars in vaults in London or Zurich. The fund charges an expense ratio of 0.60%. With about $824 million in total assets under management, this ETF is the largest and the only physically backed platinum ETP.

iPath DJ-UBS Platinum ETN

Launched in June 2008, this ETN tracks 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 fund charges 75 basis points in annual expenses.

E-TRACS UBS Long Platinum ETN

Launched in May 2008, 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 a constant maturity of three months. The product has an expense ratio of 0.65%.

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