Platinum in the Fast Lane
January 8, 2010
By
Sean Brodrick Rich,
Uncommon Wisdom
Many investors know their way around
gold or crude oil, but not a lot
know what they need to know about
platinum. And that's too bad,
because it's becoming easier than
ever to invest in platinum, with a
third platinum exchange-traded fund
about to make its debut in the U.S.
That doesn't mean you should rush
out and buy it — there are some pros
and cons to this metal, with
potential for rich rewards and
equally big losses for the unwary.
I'll
tell you about the platinum funds.
First, some platinum facts …
-
All of the platinum ever mined
would fill a room measuring less
than 25 feet on each side.
Moreover, above ground supply of
platinum could be expected to
last about a year, compared to
about 25 years for gold.
-
The largest known reserves of
platinum are found in South
Africa, with Russia and Canada
also having some of the larger
platinum deposits. South Africa
accounts for approximately 80%
of the world's platinum supply.
Only about six million ounces of
platinum are produced by mines
every year. That amounts to less
than 5% of annual gold
production. Platinum is
rare.
-
Like gold and silver, platinum
can be used for jewelry. But
jewelry demand is now only 20%
of yearly platinum demand versus
40% just five years ago. And
even if you don't own platinum
jewelry, you may be using this
dense, malleable,
corrosion-resistant metal every
day. That's because the biggest
and growing demand for platinum
is in industrial products,
especially in catalytic
converters for automobiles.
-
Since more than half the world's
platinum is used in catalytic
converters, platinum sees its
price rise and fall with demand
for new automobiles. When the
U.S. auto industry took it on
the chin, platinum prices
plunged. They've since
recovered, but are still off
their highs.
Now
here's the interesting thing about
platinum demand. Global auto sales
are coming out of their slump and
shifting into higher gear. You saw
that Ford's sales grew 25% in
December. But China's auto sales
have passed that of the U.S., and
should grow by 44% year over year to
13.5 million vehicles.
Want some more fascinating facts?
There are about 900 cars for every
1,000 people in the U.S. But there
are only 30 cars per 1,000 people in
India, and less than 10 cars per
1,000 people in China. Where do you
think car sales will go in India and
China? I'd say zoom-zoom! And what
will that do to platinum demand for
catalytic converters? Zoom-zoom
again!
Result: Metals experts at Johnson
Matthey expected the platinum market
to have a small annual surplus of
140,000 ounces in 2009, but that
surplus could go away in 2010.
Where would that take the price of
platinum? HSBC has a target of
$1,600 an ounce, and my target is
$1,700. That's an 11% move from
recent levels.
But
it could go higher, perhaps back to
its 2008 high around $2,300 an
ounce, especially since it's such a
thin market. There isn't a lot of
platinum around. Once the bulls — or
the bears — get running, they're
hard to stop.
So
the outlook for platinum is pretty
darned bullish. And that brings us
to the platinum funds …
The
iPath Dow Jones-UBS Platinum
Trust Subindex TR ETN (PGM)
is based on an index composed of one
futures contract on platinum. It has
an expense ratio of 0.75%, and an
average daily volume of 66,000
shares. It has a market cap of
$137.77 million, and it recently
traded at a 9.25% premium to its net
asset value.
The
E-TRACS UBS Long Platinum
ETN (PTM) is based on a
basket of platinum futures
contracts. It has an expense ratio
of 0.65%, and an average daily
volume of 61,000 shares. It has a
market cap of $84.3 million, and
recently traded at a 4.28% premium
to its net asset value.
Do
you see what these two funds have in
common? Neither of them holds
physical platinum. That's not
necessarily bad, but if you like
your fund to hold the physical
metal, be aware of that. Also, both
funds have stopped creation of new
shares (for now), so they trade at a
premium.
Let's look at one-year performance
charts of PGM, PTM and platinum …
PGM
is leading the pack, but that
outperformance could go away quickly
if it starts issuing new shares and
its premium evaporates. It also
charges a higher expense ratio.
UBS
also offers the E-TRACS CMCI
Short Platinum Excess Return ETN (PTD),
a product that tracks the inverse
of a basket of platinum futures
contracts plus a fixed income return
on a Treasury Bill Portfolio. So, if
you're bearish on platinum, PTD is
the fund for you.
Anyway, now we are going to have a
NEW platinum fund to play with. ETF
Securities has filed for approval
for physically backed platinum and
palladium ETFs in the U.S. So unlike
the other two funds, which don't
have an effect on the physical
market, this new platinum fund
(symbol PPLT) will hold the actual
metal.
ETF
Securities has enjoyed quite a bit
of success with two other funds it's
launched in the U.S. recently — the
ETFS Physical Swiss Gold Shares (SGOL)
and the ETFS Silver Trust (SIVR).
Together, they have racked up about
$465 million in total assets.
Let's say the new platinum fund gets
half as much. That would take about
148,720 ounces of platinum off the
market at current prices. But it
probably won't be current prices,
because we've seen what happened to
the gold ETFs — they've become a
market mover, because metal is taken
off the market and put in storage to
back the ETFs. SPDR Gold Shares (GLD),
the world's largest gold ETF, holds
more gold than all but four of the
world's central banks and the
International Monetary Fund,
according data compiled by the World
Gold Council.
Why
would investors choose PPLT over PGM
or PTM? Well, along with the fact
that it will hold the physical
metal, ETF Securities has wrestled
market share from larger funds in
part because of its lower cost
structure. SGOL has an expense ratio
of 0.39%, which is slightly under
the 0.40% charged by the GLD, and
SIVR charges 0.30% compared to 0.50%
for SLV.
So
if a new fund starts buying physical
metal in a very small market, yes, I
think platinum could blast off.
And
that's not the only new source of
demand. Let's get back to China for
a minute. There are 1.3 billion new
consumers in that country, and they
have an affinity for precious
metals. China's demand for platinum
jewelry was expected to double in
2009, and that trend should continue
as long as prices remain below their
peaks.
In
short, the outlook for platinum is
very bullish. But before you buy, go
back and look at that first chart I
showed you. You can see a 65% drop
in platinum from peak to trough in
2008. Ouch! A volatile, thin market
can work both for and against you. I
would only recommend buying on dips
— and set your price target to sell
on the rips.
Yours for trading profits,
Sean
P.S. Be sure to check out my new
book, The Ultimate
Suburban Survivalist Guide.
It's on sale at Amazon.com right now!
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