22
May
2013

China Platinum Imports Rise – Bullish Platinum and Palladium Fundamentals

Today’s AM fix was USD 1,385.25, EUR 1,071.43 and GBP 917.75 per ounce.  
Yesterday’s AM fix was USD 1,378.75, EUR 1,070.21 and GBP 908.39 per ounce. 

Gold fell $6.50 or 0.47% yesterday to $1,377.80/oz and silver finished down 0.56%. 

The fundamentals of the platinum and palladium markets are beginning to receive market attention and not before time. The positive supply demand dynamics are leading to increased investment demand as seen in the ETF data and Chinese demand rising again due to both industrial and jewellery demand.


Source: Bloomberg, China Customs General Administration – (UBS
)

Net platinum imports into China jumped to 8.9 metric tonnes last month, marking the strongest inflow in about a year according to UBS. 

This reflected a 14% increase from March, and year-on-year growth of 29%. The trade data coincides with strong platinum volumes on the Shanghai Gold Exchange (SGE), which coincidentally also totalled 8.9 tonnes for the whole month of April, the strongest turnover since September 2011. The fall in prices towards $1,400/oz prompted a pick-up in physical buying. 

Jewellery demand was cited by UBS as the main source of the physical buying.  

While gold is still the more popular precious metal in China, platinum jewellery has also enjoyed an improvement in demand. Johnson Matthey estimates a 14% increase in net global platinum jewellery offtake last year, with China accounting for a large portion of the increase. The expansion in the number of retail outlets across second and third tier cities in China has contributed to the growth in platinum jewellery demand. 

Although platinum’s discount to gold in 2012 did not necessarily translate into relatively cheaper platinum jewellery at a retail level, better margins would have encouraged sellers to exert more effort in promoting platinum. The surge in China’s platinum imports and increased SGE activity in April is a reflection of the physical demand response to the price drop, similar to that seen in gold.


Avg Known ETF Platinum Holdings – (Bloomberg)

Investment demand is likely to have received a boost from the announcement in March that Russia and South Africa, which together control about 80% of the world’s reserves of platinum group metals, plan to create a trading bloc similar to OPEC to control the flow of exports of the precious metals.


Source: Various ETFs – (UBS
)

The increase in the holdings in of the platinum and palladium ETFs has been significant but the holdings remain very small compared to the far more successful gold and silver ETFs.

Platinum Group Metals (PGM) are seeing broad base global demand. Besides investment demand, they are widely used to make catalytic converters that filter car exhausts, in jewellery where increasing demand has been seen in Asia, and in many military applications. 

The majority of the world’s platinum reserves are found in just one country, South Africa which is home to 75% of global platinum production and 95% of known reserves. Neighboring Zimbabwe also sits on large reserves. 

Resource nationalism as has been seen in Zimbabwe, Russia and Latin American countries in recent years is a real risk. This seems likely to lead to serious supply issues in the coming years which mean that the fundamentals of the PGM remain very attractive. 

Both are trading well below their record nominal highs and way below their inflation adjusted highs.


Platinum in USD/oz, Monthly, 1983-2013 – (Bloomberg)

We believe that due to the very favourable supply demand dynamics in the platinum market, it should rise well above the inflation adjusted record high from 1980 at $2,700/oz in the coming years from $1,468/oz today.

Palladium could see similar returns and should rise above both its nominal high and inflation adjusted high in the coming years.

The Platinum Group Metals are more volatile than gold and therefore merit a lesser allocation of one’s wealth but platinum and palladium coins and bars in allocated accounts remain a prudent diversification for anyone wishing to preserve and grow wealth in the coming years.


Palladium in USD/oz, Monthly, 1983-2013 – (Bloomberg)

Many studies have shown that, precious metals are one of the few asset classes with a positive correlation coefficient with inflation. According to Ibbotson Associates, precious metals are the most positively correlated asset class to inflation. From a strategic point of view, Ibbotson determined that portfolios with a 7-15% allocation to gold, silver, platinum and palladium bullion could reduce risks and improve returns. 

The bullish supply demand fundamentals of the platinum and palladium markets is something we have long highlighted. Both metals remain attractive and important diversifications which can protect investors and store of wealth buyers from inflation and currency devaluation. 

They also have the potential for sizeable capital gains given the unstable outlook for supply from primary producer countries, Russia and especially South Africa.

Real diversification means including allocations to gold, silver, platinum and palladium bullion in your portfolio.

NEWS
Gold Is Still Relevant as Insurance Policy – Bloomberg

Gold gains on U.S. stimulus hopes; Bernanke eyed – Reuters

Platinum Buying Quickens as Gold Allure Diminishes – Bloomberg

Opening of Chinese-Aussie gold mine shows solid partnership between Canberra, Beijing – Xinhaunet

COMMENTARY
Platinum and Palladium: A Fundamental Shift – Casey Research

Video: Platinum and Palladium Shine as Gold Tumbles – Bloomberg

Jim Willie: Coming to a Climax with Gold at $7,000/oz – You Tube

Texas Pension Fund: "Gold is a hedge, and it still fills that role" – Wall Street Journal

Butler: Blockbuster in Gold – SilverSeek

For breaking news and commentary on financial markets and gold, follow us on Twitter.

 

 
Mark O'Byrne
Executive Director