Platinum group metals are positioned for a stellar year, with new investment vehicles in the United States seen as a precursor to a wave of investment buying in anticipation of a recovery in industrial demand. The launch of platinum and palladium-backed exchange-traded funds on the New York market has given US investors their first opportunity to invest in the metals via an ETF.
"We think platinum will be the best performer this year," said Daniel Smith, an analyst at Standard Chartered in London. "If you look at where we are in the economic cycle and where (mining) costs are as well in South Africa, platinum is quite a bullish story overall," he said. "The US ETFs are just adding fuel to the fire." ETFs have already proved a popular way to invest in gold. The largest gold ETF, the SPDR Gold Trust, is the world's number six bullion holder ahead of China, Japan and Switzerland.
Ross Norman, director of TheBullionDesk.com, said if platinum group metals ETFs garner similar investment flows, they could attract some 3 million ounces in the next four-six years. This could have a stabilising effect on the market, he said. "Many producers and consumers see (ETF investment) as a third leg to the demand side," he said, with such buying adding to industrial and jewellery demand.
"When prices are cheap, typically investors will buy and when they are expensive, they'll sell," he said. "So to an extent, they see it as a way of stabilising prices." The new US funds, operated by a US subsidiary of London's ETF Securities, started trading on January 8 on the NYSE Arca platform of the New York stock exchange.
An initial issue of 100,000 shares - each backed by a tenth of an ounce of the metal - was made prior to the launch of the platinum fund. Further shares will be issued on demand, and metal bought by the market maker to back them. US traders expect the new ETFs to spark significant new investment flows.
"Even if the new products have just a fraction of the success of the GLD, it puts a new demand quotient under the curve," said Frank McGhee, head precious metals trader of Chicago-based Integrated Brokerage Services. "Platinum is a small market," he added. "Even a modest success puts a tremendous floor under the market."
In Europe, buying of platinum group metals-backed exchange traded funds boomed last year. ETF Securities more than quadrupled holdings of its London-based palladium ETF in 2009, while those of its London platinum product more than doubled. The other major operator of precious metals ETFs in Europe, Zurich Cantonal Bank, said its platinum-backed product also more than doubled in size last year.
CAR SALES SET TO RISE Signs of economic recovery had already helped platinum and palladium to start breaking higher late last year. Prices rose steadily through 2009 after crashing to multi-year lows at the end of the previous year. Platinum rose 58 percent and palladium more than doubled in value in 2009, and prices are extending those gains this year. Both hit their highest since mid-2008 last week amid news of the launch of the US ETFs and signs industrial demand is rising.
"There are lots of reasons to believe that more industrial precious metals like platinum and palladium will outperform gold, because the industrial sector in general has been stronger," said Commerzbank analyst Eugen Weinberg. Car demand specifically will be key for platinum group metals, over half of which is typically consumed by automakers.
Analysts say China, which overtook the United States as the world's largest auto market last year, is likely to post slower but more rational car sales growth of around 10 percent in 2010. A strong end to 2009 for US and European car sales may also have set the industry up for a better 2010, they added.
Tom Kendall, precious metals strategist at Mitsubishi Corp, said while industrial uptake had not so far risen strongly, buying in expectation of an improvement in industrial demand and worries over supply were lending plenty of support to prices. "People look at South Africa and find it hard to be positive about the chances of real improvement in the situation with regards to safety, labour relations, costs," he said.
South Africa is the source of four out of five ounces of the world's platinum, and a third of its palladium. Analysts will be closely watching whether cuts to capital expenditure there, particularly given the slump in prices in late 2008 and early 2009, will curb output and lift prices.
Platinum reached a record high $2,290 an ounce in March 2008 amid fears over a shortage of South African supply, while palladium hit a seven-year peak the same month at $590 an ounce. While few analysts are forecasting a return to those highs, early predictions are for the precious metals to stick to an upward trend in 2010. "This year will be a PGMs year," one precious metals trader said. "That is really where the news is."