Platinum Joins the Metals Rally
Authored by John Ciampaglia, CFA, CEO Sprott Asset Management
Platinum is the value play in precious metals as gold continues to rally...there is limited downside given Pt prices are at historically low levels.
Platinum may claim 2019 as a turning point year despite a volatile first eight months. From the start of January to Friday, August 30, platinum’s spot price has jumped 17.34%.
Many indications point that platinum’s multi-year period of stagnation may finally be ending. A year ago, I first wrote about The Platinum Opportunity, and we held the view that platinum was “too cheap to ignore.” Since then, the metal has zig-zagged higher from $791.21 (8/27/18) to $917.10 (8/30/19), and we are seeing new headlines like “Is Platinum the New Gold?
Figure 1. The Precious Metals Rally Gains Steam...Platinum Joins In
Periods Ending Friday, August 30, 2019
|S&P 500 TR ($USD)||15.34%||2.92%|
|Spot Gold ($USD)||18.55%||26.54%|
|Spot Silver ($USD)||18.59%||26.31%|
|Spot Platinum ($USD)||17.34%||18.55%|
|Spot Palladium ($USD)||21.76%||56.34%|
Today, platinum is being supported by compelling bullish drivers. There are several reasons to be confident that platinum’s rise may continue:1
- Highest quarterly platinum ETF growth since their launch in 2007;
- Investment demand has surged as institutions begin to factor low price and positive fundamental outlook;
- Supply is relatively constrained with limited investment in new platinum group metals (PGM) mines;
- Platinum price is undervalued relative to gold and palladium;
- Total PGM demand growth should continue due to increasingly restrictive emissions rules;
- Market balance mismatches between palladium and platinum argue for substitution (palladium’s price premium to platinum reflects a tight market).
A Tale of Two Metals: Platinum vs. Palladium
In the past three years, platinum and palladium have experienced contrasting performance as shown in Figure 2. Platinum has weakened, while palladium shot to new highs. Between August 1, 2016, and July 31, 2019, palladium’s price increased an astounding 112.24%, from $716.13 to $1,519.91, reaching record highs. Palladium’s price per ounce is now on par with gold’s price. By contrast, platinum fell 25.36% in the same period, reaching levels it had not seen since 2003 (its price per ounce dropping from $1,158.55 to $864.75).
The good news? Twice this year, platinum has tested the $900 mark, first in April and again at the time of this writing (Figure 3), indicating that its slump may be over.
Figure 2. Three-Year Comparison: Platinum, Palladium and Gold (2016 - YTD 8/29/19)
Figure 3. 2019 YTD Comparison: Platinum, Palladium and Gold (normalized)
Cars and the Platinum Group Metals
As we discussed in “The Palladium Play - Part 1,” palladium’s multi-year price resurgence has been driven by demand in the auto sector. The key component in the catalytic converters of non-diesel engines, autocatalysts, employ either platinum or palladium since there’s little difference between the two, aside from their price.
As the price of platinum reached all-time highs near $2,000/oz in 2008, manufacturers began shifting the metal they were using in autocatalysts to palladium, the cheaper option at the time. This global transition in autocatalysts jumpstarted the palladium market, propelling the metal to its current record-high price point. Autocatalysts now account for 75% of the demand in the palladium sector.
Investment Demand on the Rise
Investors are now embracing the opportunity we predicted in the platinum space -- demonstrating increased confidence that the metal’s price will correct upward toward more historic norms.
Earlier this year, institutional investors began to take notice that platinum was severely undervalued and began re-investing in the metal. YTD through the end of July, there has been net ETF (exchange-traded fund) inflows of 750,000oz (Figure 4), the most significant gain since 2007, when platinum ETFs were first introduced. We are now seeing this investment demand broaden to the individual investor.
Figure 4. Platinum ETF Holdings Increase by 755 Koz (YTD 7/31/19)
Source: World Platinum Investment Council.
As we have detailed in our previous reports, “Platinum Opportunity Part 1” and “Part 2,” palladium’s higher price is forcing catalytic converter manufacturers to rethink their use of the metal. Not only does palladium trade at more than a $600/oz premium to platinum, but it also faces a supply crunch. Despite the doubling of palladium’s price since 2015, production increases have not moved forward in a meaningful fashion. With a supply shortfall in palladium and a lack of production increases or new palladium mines (Figure 5), this supply-demand imbalance will likely continue for the foreseeable future.
A switch back to platinum will take time on the part of manufacturers. When analysts factor in switching costs, they predict it will take at least 18-24 months for an industry-wide transition. Despite this, we expect multiple trends will continue to push platinum higher.
Figure 5. Growing Shortage: Palladium Supply has been in Deficit Since 2012
Source: World Platinum Investment Council.
Figure 6. Uses of Platinum (Pt) - Palladium (Pd)
Learn More About Sprott Physical Platinum and Palladium Trust (SPPP)
|1||World Platinum Investment Council. August 2019.|
Insights from Sprott
More on Platinum
Past performance is no guarantee of future results. You cannot invest directly in an index. Investments, commentary and statements are unique and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this commentary are those of the presenter and may vary widely from opinions of other Sprott affiliated Portfolio Managers or investment professionals.
This content may not be reproduced in any form, or referred to in any other publication, without acknowledgment that it was produced by Sprott Asset Management LP and a reference to sprott.com. The opinions, estimates and projections (“information”) contained within this content are solely those of Sprott Asset Management LP (“SAM LP”) and are subject to change without notice. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. SAM LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. SAM LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, SAM LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.
SAM LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the document carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.
The risks associated with investing in a Trust depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing.
The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada or the United States should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on their specific circumstances before taking any action.
© 2021 Sprott Inc. All rights reserved.