What Lies Ahead For The Platinum ETF [ETFS Physical Platinum Shares(NYSEARCA:PPLT)]

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May 4, 2014 10:46am NYSE:PPLT

platinum11After some rough trading last year, many commodities are seeing a nice comeback. In fact, commodities have outperformed equities to start the year for the first time in a while.

This trend is largely thanks to squeezing supply and growing demand. And while many have been impacted, the precious metal platinum also saw decent returns during the first quarter this year and could be well-positioned for more gains in the months ahead.

Weak macroeconomic conditions over the past couple of years caused a slump in demand for platinum, with prices declining more than 25%, since 2009. However, platinum, often called the “rich man’s gold”, might see good performance this year based on improving global demand conditions along with supply shortages.

Let’s look at the reasons why this metal is expected to perform well going forward in detail below:

Supply disruptions from South Africa 

Supply disruptions from South Africa, the largest producer of platinum in the world, are expected to be a catalyst for this metal (read: Why Platinum ETFs Are Poised for More Gains).

South African platinum producers, which account for almost three quarters of world supply, have been plagued by labor problems for the past couple of years. Strong labor unions have made the South African labor market quite inefficient. Currently, workers in the platinum industry there are on an 11-week strike.

Around 70,000 workers from the world’s largest producers of the metal, namely, Anglo American Platinum Ltd. (AMS), known as Amplats, Impala Platinum Holdings Ltd. (IMP.TO) and Lonmin Plc (:LMI), are on strike.

The strikes and violence have caused supply bottlenecks, thereby working in favor of platinum prices.

Moreover, things are not so bright with Russia – the second largest producer of this metal. This precious metal has also benefited from the ongoing geo-political tensions between Russia and Ukraine, causing further supply disruptions.

Rising Demand 

Platinum has important industrial applications and hence its price is largely determined by economic trends. Auto-catalysts that cut pollution from vehicles are big users of platinum-group metals.

A reviving global auto industry is expected to boost the demand for platinum used in cars. The Chinese auto market is expected to witness strong growth this year due to the burgeoning Chinese middle class. Moreover, the U.S. and Europe auto markets are also seeing strong momentum on the back of a domestic market recovery.

Platinum is also increasingly used for making jewelry. An aspirational Chinese middle class is expected to drive up its demand (see all the Precious Metals ETFs here).

Given dwindling supplies and rising demand, platinum should be on a roll this year. For investors seeking to get in on the platinum market, ETFS Physical Platinum Shares (PPLT) is a good choice to do so. The product has a favorable Zacks ETF Rank #2 or ‘Buy”, indicating that it is expected to outperform the broader markets.

PPLT in Focus

Launched in January 2010, this ETF tracks the performance of platinum’s price, and is quite a popular fund in the precious metals space managing assets worth $741.3 million. The product invests in bars of platinum and holds them in a secure European facility on behalf of the custodian, JPMorgan Chase Bank.

Investing through PPLT in platinum represents a cost effective and suitable mode for investors. The product charges a decent 60 basis points a year, and has an average volume of more than 40k shares traded a day.

Though the fund had lost around 13% in the last one year, it has regained around 6% since the start of the year and could be poised for further gains this year as well.

This article is brought to you courtesy of Eric Dutram.

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