More Disappointment For Platinum

Platinum and palladium are the two platinum group metals that trade on the CME’s NYMEX division. While Russia is the world’s leading palladium producer, it is second to South Africa in platinum production. In 2020, South Africa produced approximately 120 tons of platinum, while Russia’s output was 21 tons. Meanwhile, Russia’s production was around 15% of the total global production. 

In March 2022, gold and palladium futures prices rose to new all-time highs, while platinum’s high was half the price at the 2008 peak that took the price to $2308.80 per ounce. Platinum has lagged gold, palladium, and many other commodity prices since they reached multi-year lows in 2020. If platinum is not exploding on the situation with the world’s second-leading producer of the metal, it is hard to think of what will ignite a bullish fuse under the metal. 

Platinum rallies, but it does not challenge critical technical resistance

On March 8, April COMEX gold futures rose to $2078.80 per ounce, a marginal new record high. The previous day, June NYMEX palladium futures reached $3,425 per ounce, a significant new peak. Platinum followed its precious cousins higher, with the April contract reaching $1197 per ounce on March 9. The continuous contract high was $1,154. While gold and palladium reached new highs, platinum fell short of the February 2021 peak.

The long-term chart shows that platinum futures stopped at $136.60 per ounce short of challenging the February 2021 high, and $1154 is half the price at the 2008 $2308.80 all-time high. Platinum did not challenge the medium-term technical resistance target at the recent March peak. Platinum turned lower and was back at the $1000 level on the April contract on March 15.

Investors have shunned platinum

In precious metals, investment demand is a critical factor for the path of least resistance of prices. At least three factors have weighed on platinum for more than a decade:

• After reaching $2308.80 per ounce in March 2008, platinum fell 67% to a low of $761.80 seven months later in October 2008. The dramatic decline caused many investors to abandon platinum as an investment metal. 
• As of March 14, the total number of open long and short positions in the NYMEX platinum futures market stood at 69,003 contracts. Each contract contains 50 ounces of metal, making the open interest 3,450,150 ounces. Gold’s open interest at 624,775 contracts represents 62,477,500 ounces, as gold contracts contain 100 ounces. The futures market reflects the over-the-counter markets, and gold is over eighteen times larger and more liquid than platinum. 
• Platinum has made lower highs and lower lows since 2008, with the latest low coming in March 2020 at $595.90 per ounce. Gold fell to $1452.10 in March 2020 as the yellow metal held up a lot better than platinum.

Platinum is struggling to make a comeback, as it has been trending higher since late 2021. 

The chart shows the pattern of higher lows and higher highs since April platinum futures traded at $886.10 on December 15 and rallied by over 35%, reaching $1197 on March 9. Meanwhile, platinum continued its long habit of failure as the price returned to the $1000 level on March 15. 

Platinum has many uses

Aside from its tepid attraction as an investment metal, platinum has many fabricated and industrial uses. Platinum is used extensively for jewelry, but its main application is in catalytic converters for cars, trucks, and buses, accounting for around 50% of the annual demand. Platinum effectively converts emissions from vehicle engines into less harmful environmental waste products. Meanwhile, diesel engines tend to use platinum in their catalytic converters. 

Platinum is also required in the chemicals industry as a catalyst for nitric acid, silicone, and benzene production, and it is a catalyst that improves the efficiency of fuel cells. The electronics industry uses platinum for computer hard disks and thermocouples, and platinum is a critical metal for optical fibers and LCDs, turbine blades, spark plugs, pacemakers, and dental fillings. Platinum compounds are chemotherapy drugs that treat cancers. 

Substitution for palladium could be platinum’s best chance for a substantial rally

The most extensive demand for catalytic converters comes from gasoline-powered cars that traditionally require palladium. 

Russian export bans may cause palladium shortages, and the current price differential between the platinum group metals could cause carmakers to switch from palladium to platinum-based catalysts. On March 15, June palladium was trading at below the $2,400 per ounce level, down over $1,025 per ounce from the March 7 high. 

The chart shows the June palladium futures price more than doubled from the December 15, $1550 low to the March 7, $3425 high before falling by over $1000 in volatile trading. 

Meanwhile, with April platinum futures at the $1000 level on March 15, platinum was around $1400 per ounce less expensive than palladium. We could see substitution lift platinum demand as Russia cuts back on exports and US, European, and other carmakers move away from reliance on the metal that comes from the sanctioned country.  

PPLT is the most liquid platinum ETF product

A move away from palladium to platinum could be the industrial shot in the arm that the platinum market needs to make a long-overdue recovery. 

The most direct route for a platinum investment is via the physical bars and coins. The NYMEX futures have a delivery mechanism, which converges with the physical price. 

Meanwhile, the most liquid ETF product is the Aberdeen Physical Platinum ETF (PPLT). At the $93 level on March 15, PPLT had over $1.245 billion in assets under management. The ETF trades an average of 238,892 shares each day and charges a 0.60% management fee. According to the ETF’s fund summary, PPLT holds its assets in physical platinum bullion. April platinum futures rallied 35.09% from December 15, 2021, to March 9, 2022. 

Over the same period, PPLT rose from $83.20 to $109.85 per share or 32.03%. The slightly lower gain was because of the management fee and timing. The ETF only trades during hours when the US stock market operates, while platinum trades around the clock during the business week and often makes highs or lows during European hours. 

Platinum disappointed on the upside as the price fell from nearly $1200 back to the $1000 per ounce level in one week. Still, the odds favor higher prices as Russian palladium shortages could cause industrial users to shift towards platinum, a less expensive substitute that can do the same job.