The Platinum Supply Squeeze Is Just Getting Started [ETFS Physical Platinum Shares(NYSEARCA:PPLT)]

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July 7, 2014 2:45pm NYSE:PPLT

platinum11A funny thing happened when 70,000 platinum miners returned to work across South Africa recently, ending a five-month strike. The price of platinum went


up.

Doesn’t the end of a strike mean more supply? Why would platinum prices go up when a strike ended?

Oh, there is a lot going on for this white metal. Let me give you the scoop.

Platinum is 30 times scarcer than gold. And South Africa produces 70% of the world’s supply.

So yeah, the strike at platinum mines across that country was a big deal.

But the end of the strike doesn’t mean a flood of supply onto the market. Far from it.

Supply Is Still Skintight

In fact, this could be the year of the platinum supply squeeze. Industry analysts at Johnson Matthey estimate the platinum market will register a deficit of at least 1.22 million ounces this year. That’s a record… and it’s a conservative estimate.

A whopping 1 million ounces of platinum production was lost due to the strike, according to an analysis in Financial Times.

And even though the strike is over, it’s going to take a long time for production to ramp up again. Thomson Reuters GFMS estimates another 300,000 ounces of production will be lost as companies take months to return mines to prestrike output.

Heck, the CEO of platinum producer Implats says it will take his company at least three months to return to full production.

Demand Could Ignite

Platinum fabrication demand dropped last year to 7.2 million ounces. That was a decline of 1.8%. It was the first decline in demand since 2009. The culprit was weakness in the platinum jewelry sector due to reduced demand from China.

But that was last year. This year, demand is expected to climb 1.8%.

Next to jewelry, the biggest type of platinum demand is for catalytic converters in diesel cars. Sales are starting to pick up in Europe, the biggest market for diesel automobiles. In May, European Union passenger car sales rose 4.5% from a year earlier.

Platinum has other industrial uses including…

  • Glass-making for televisions screens
  • Hard disk drives
  • Plating and thermocouples
  • Some types of fuel cells
  • As a chemical reagent. 

Investors hold a record 86.5 metric tons of platinum in exchange-traded products, according to Bloomberg. The funny thing about investors is they want more of something when the price goes up.

If a worsening squeeze ignites platinum prices, investor demand could be the gasoline on the fire. The amount of platinum held by exchange-traded funds jumped 55.4% last year.

Delayed Reaction

Despite the strike, the price of platinum is up only 6% this year… so far. And this chart of ETFS Physical Platinum Shares(NYSEARCA:PPLT), an ETF that holds physical metal, shows that platinum is way off highs it hit last year.

Looking at the chart, you can see that the price has been moving sideways. The price reaction to the strike was muted because producers were supplying metal from their processing pipelines and inventories.

However, GFMS research director of precious metals William Tankard explained that deleting stockpiles only delayed a potential big price move.

“Only now are critical shortages coming through at the refinery level. As this becomes more pronounced, I would expect to see a response in the price,” he said.

Technically speaking, platinum looks ready to break out.

How You Can Play It

The ETFS Platinum fund, which has an expense ratio of 0.6%, is an easy way to play platinum. It’s quite liquid to trade, and has grown into the 10th-largest fund in the commodity space with about $765 million under management.

You can also buy physical platinum coins from the U.S. Mint and other mints.

And there are select miners that should do very well as the price of platinum goes higher. A great miner can deliver big returns quickly, but investing in them can be quite speculative.

For investors interested in profiting from gold, platinum, oil, and other things pulled from the ground, I recommend reading Oxford Resource Explorer. Subscribers have enjoyed an average gain this year of 20%, and they’re in the money on 13 of 15 of the recommended stocks, including several in the mining business.

It doesn’t get much better. To learn how to join them, click here.

Good investing,

by Sean Brodrick, Resource Strategist

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.


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