HardAssetsInvestor

Written by Michael A. S. Guth  |

June 17, 2008

Platinum Supplies Hoarded By ETFs

Details

How will the seesaw of prices and supply and demand tilt in the coming years?

• ETFs vs. industrial uses
• Platinum hotter than gold?
• Production disruptions in South Africa

 

Move over gold! Platinum has become the hottest commodity investment among metals. This past year exhibited an unprecedented rise in world platinum prices. Platinum prices hit a record of $2,273/ounce last March, which represented a 70% spike over the price in mid-August 2007, of approximately $1,265/ounce as recently reported in the International Herald Tribune. On June 9, 2008, the NYMEX Platinum futures contracts closed at $2,069 an ounce.

Industrial demand is not alone in causing the dramatic spike in platinum prices seen this year. According to some, European commodity-based exchange-traded funds (ETFs) exacerbated the price shock by bidding up the price of platinum for speculation. These ETFs hold platinum in bank vaults to back their securities. The ETFs do not consume platinum, so eventually their platinum holdings could be released on the open market. But as long as platinum prices keep rising, and investment flows keep coming, the ETFs will likely continue to expand and acquire more platinum rather than release their hordes.

The European-based platinum ETFs, including those managed by ETF Securities and Switzerland's ZCB, together own about 365,000 ounces of platinum as compared to about 40,000 ounces at the end of 2007. All of that platinum stored by the ETFs has been taken away from industrial users and no doubt contributed to the rise in platinum prices.

The question is, how much?

Demand Choked?

When ETF Securities and ZCB's funds were created in April 2007, two of the largest platinum suppliers by volume, Anglo Platinum and Impala Platinum, were quoted by Reuters as saying they refused to supply any platinum to the ETFs. The suppliers were justifiably concerned that the higher platinum prices caused by the ETF hordes would eventually choke off demand for platinum jewelry and pressure the automotive industry to substitute platinum's sister metal, palladium, in catalytic converters. Once the automotive industry changed its manufacturing processes to accommodate palladium, they would not be returning to the platinum market. The scenario predicted by the platinum suppliers appears to be playing out.

The U.S. does not have platinum ETFs, but Swiss global bank UBS introduced two exchange-traded notes (ETNs) - E-TRACS UBS Long Platinum ETN (NYSE Arca: PTM) and E-TRACS UBS Short Platinum ETN (NYSE Arca: PTD) - in May 2008. These ETNs track the prices of platinum futures contracts but do not require platinum to be held as security. ETNs are senior unsecured debt obligations issued by financial institutions and carry credit risk. They essentially represent a promise by the issuer to deliver the performance of an index, minus fees.

The new notes allow investors to take a bullish or bearish view on platinum. The E-TRACS UBS Long Platinum ETN simply follows platinum futures prices, while the E-TRACS UBS Short Platinum ETN works in the opposite direction for those interested in shorting the UBS Bloomberg CMCI Platinum Excess Return.

At the hefty price of $2,069/ounce, industrial users have financial incentives to substitute palladium and other metals for the more expensive platinum in manufacturing processes. Historically, the automotive industry represents the single largest source of demand for platinum, which is needed in manufacturing catalytic converters, especially in diesel cars and trucks. Catalytic converters are cylinders formed into a fine honeycomb, coated with a solution of chemicals and platinum-group metals, mounted inside a stainless steel canister and installed in the exhaust line of a vehicle to remove pollution particles.