Commodities/Forex

Andy Hecht

Top 3 Ranking in Commodities, Metals & FX --SeekingAlpha

Platinum Outperforms Gold And Silver- A Reversal Of Fortune

  • Gold and silver are down on the year
  • Platinum goes the other way
  • A correction is long overdue
  • Palladium and rhodium point to higher platinum prices
  • Watch the $1000 level as it could launch platinum

While palladium has been one of, if not the best, performing commodity since early 2016, platinum has been one of the worst. Platinum is both an industrial and precious metal. For many years market participants referred to platinum as “rich man’s gold,” but it has been anything but that given its price performance.

Precious metal prices hit lows in late 2015 and early 2016. Gold fell to $1046.20 during the final month of 2015 while silver declined to a low at $13.635 during the same month. Palladium bottomed in January 2016 at $451.50 per ounce, and platinum fell to $812.20 at the same time. Three of the four precious metals that trade on the COMEX and NYMEX exchanges have not returned to those lows, but platinum fell to its most recent low at $755.70 in mid-August 2018 which was the lowest price for the metal since 2003.

Platinum has the highest density and resistance to heat of all of the precious metals which leads to a myriad of industrial applications. At the same time, platinum has a history as a store of value which makes it attractive as an investment. However, those qualities had done little to support the price of the metal, even though the price of palladium recently rose to almost $1600 per ounce while gold is appreciably higher than its 2015 low. While the silver price has been weak, it too outperformed platinum over the recent years.

In 2019, there are signs that the price of platinum is beginning to rebound. Given the current value proposition for the precious metal, we could be on the verge of a period of substantial appreciation for the metal that had been a laggard in the sector for so long.

Gold and silver are down on the year

After a bullish start to 2019 that took the price of gold and silver higher, both were lower than the end of 2018 closing prices as of Thursday, April 18.

Source: CQG

As the weekly chart of COMEX gold futures highlights, the yellow metal was trading at the $1284.70 level at the end of 2018 and was trading at $1273.10 at the end of last week. Gold had traded to a high at $1344 in mid-February but failed.

Source: CQG

Silver was at $15.56 per ounce at the end of last year and declined to $14.965 on April 18. Silver rose to a high at $16.20 per ounce in January and February, but the price failed and fell back below the $15 level. The prices of the two most actively traded precious metals lost ground so far in 2018.

Platinum goes the other way

Platinum has experienced a reversal of fortune so far in 2019 as the price is higher than the closing level at the end of December 2018.

Source: CQG

The weekly chart illustrates that platinum closed last year at $788.50 per ounce, and was trading at $894.20 on April 18, an increase of 13.4% over the past three and one-half months.

Platinum had been beaten like a red-headed stepchild for years, but the price action so far this year could be a sign that a long overdue correction is underway in the rare precious metal.

A correction is long overdue

South Africa and Russia account for the vast majority of annual platinum output each year. In South Africa, the low price over recent years has led to a decline in production as the price has fallen to a level that is under the cost to produce the metal. Primary platinum production tends to occur in deep mines, and the economics of extracting the metal from the crust of the earth has caused some producers to shut down the higher cost veins were the reserves reside. In Russia, platinum is a byproduct of nickel output, and the Russians tend to be highly secretive about their production activities.

The correction in the price of platinum began after the metal fell to its lowest price since 2003 at $755.70 in August 2018. Since then, platinum has made higher lows and higher highs with the most recent peak coming during the week of April 8 at $905.50 per ounce on the continuous futures contract which was the highest price since June 2018. Before that, platinum had been on the decline since 2008, with a steady pattern of lower highs and lower lows since 2011.

Source: CQG

The monthly chart shows that platinum experienced a shock to the downside during the 2008 global financial crisis when the price fell from an all-time peak at $2308.80 in March to a low at $761.80 in October of that very same year. The 67% plunge in seven months likely left many speculators and investors with a sour taste in their mouth when it came to investments in the metal over the past eleven years.

Platinum climbed back to a high at $1918.50 in 2011 when gold moved to its all-time peak at just over $1920 per ounce, and silver rose to $49.82. Since then, platinum has done nothing but make lower highs and lower lows with the most recent bottom coming last August. To break the bearish price pattern, platinum would need to rise above the $1000 with a convincing break to the upside above the 2016 high at $1199.50. While platinum’s price has improved so far in 2019, it will need to do a lot more work to break to the upside and out of a bear market that has gripped the metal since the 2011 peak.

Palladium and rhodium point to higher platinum prices

As platinum group metals, platinum, palladium, and rhodium all share similar characteristics. However, platinum’s density and resistance to heat make the metal attractive for industrial consumers. At the current price level, the metal offers a better value proposition than its sister metals. The price of palladium has been on a tear since early 2016.

Source: CQG

As the monthly chart displays, the price of palladium appreciated from $451.50 in January 2016 to its current level around $1410 per ounce. While palladium appreciated by over three-fold, the price is lower than the most recent high which took the metal to $1599.10, another in a series of new record levels for the palladium markets. Palladium is the most popular metal when it comes to applications in catalytic converters for gasoline-powered automobiles. However, platinum has the potential to act as a substitute for palladium, and the current price differential makes platinum attractive to manufacturers.

Rhodium is a platinum group metal that only trades in the physical market because of its limited annual supply. Rhodium also has a myriad of industrial applications, but its price has also risen to a level where platinum could serve as a substitute.

Source: Kitco

The price of rhodium fell to under $600 per ounce in 2016, but since then the metal has even outperformed palladium as it was trading at a midpoint value of $2825 per ounce on April 18 which is 4.7 times the price at the low just three years ago. Rhodium is a byproduct of platinum production in South Africa, and decreased output in primary platinum mines has led to a shortage of rhodium which sent the price significantly higher to its most recent peak at over $3200 per ounce. Rhodium remains far below its all-time peak which was at over $10,000 per ounce

Given the performance of palladium and rhodium, it may be only a matter of time before a significant correction to the upside occurs in the price of platinum.

Watch the $1000 level as it could launch platinum

The first level of technical resistance in the platinum market stands at the critical psychological level of $1000 per ounce. On the monthly chart, resistance stands at the February 2018 peak at $1016.50, the January 2018 high at $1022.60, the September 2017 peak at $1026.50, and the February 2017 apex at $1047.80. There is a cluster of resistance between $1000 and $1050 in the platinum market. Above there, $1199.50 stands as a critical line in the sand for the platinum market.

The value proposition for platinum is compelling at its current price at just under $900 on the continuous NYMEX futures contract and at the $903.70 level on July futures which was the settlement price on April 18. The most direct route for investment in platinum is through the physical market. Dealers around the world provide investors with platinum bars and coins that often trade at significant premiums to the spot price because of the rare nature of the metal. The NYMEX provides a 50-ounce contract in platinum. At $900 per ounce, the total value of a platinum contract is $45,000. Taking delivery of platinum on the exchange could be a way of avoiding the premium on the physical metal, but it involves some exchange and warehouse costs.

The PPLT is the most liquid platinum ETF product with net assets of $591.02 million and an average of 95,395 shares changing hands each day. PPLT represents one-tenth of an ounce of platinum, and the ETF holds physical platinum bullion, so it does an excellent job replicating the price action in the platinum market. The ETF charges an expense ratio of 0.60%. Another alternative is the less liquid PLTM ETF product which represents one-hundredth of an ounce of platinum. PLTM only has net assets of around $4 million and trades an average of 4,350 shares each day, but it offers a lower expense ratio of 0.50%. PLTM also holds physical platinum bullion with 100% of its assets. While both PPLT and PLTM replicate the price action in the platinum market, the higher level of net assets in PPLT could result in a tighter bid/offer spread at times, especially if the price becomes more volatile.

A long position in platinum is still a value play in the precious metals market today. However, as a less liquid metal when compared to gold and silver, platinum could become highly volatile over the coming weeks and months if the price is preparing to take off to the upside. The price action in palladium since 2016 could be an example of what we may see in platinum if the price finally begins to move higher.

Platinum has been showing some signs that a reversal of fortune may be in the cards for the rare precious metal. A purchase of the metal at the $900 level may not be buying at the lows but could look pretty attractive in the years ahead as the metal continues to offer the best value proposition in the precious metals sector. If platinum returns to its position as “rich man’s gold” the current price is a bargain.

Andy Hecht covers Commodities and Forex as one of the original contributing analysts at FATRADER. A former senior trader at one of the world’s leading commodities trading houses, Philipp Brothers (now part of Citigroup), Andy has worked and consulted for banks, hedge funds, and commodities producers and consumers around the world for over 35 years.
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