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IPMI and Industry News: Platinum Market News

PLTM Weekly: Waiting For Weakness In Q4

Thursday, October 15, 2020   (0 Comments)
Posted by: Matt Watson
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PLTM Weekly: Waiting For Weakness In Q4

 

Oct. 14, 2020 4:49 PM ET


Summary

Despite the recent rebound in the precious metals, PLTM has performed the weakest among its group.

The relatively weak market action in PLTM confirms our cautious near-term stance toward PLTM, driven by negative fundamentals and unsupportive seasonality in Q4.

Platinum looks fairly valued based on its relationship with spec positioning and a little expensive based on its relationship with ETF positioning.

In case of a notable dip in Q4, we may intend to build a strategic long-term position in PLTM, especially considering that platinum looks substantially too cheap compared to palladium.

Welcome to Orchid's Platinum Weekly report, in which we discuss platinum prices through the lenses of the GraniteShares Platinum Trust (PLTM).

Thesis

PLTM has performed the weakest among the precious metals group since the start of October, as the index chart below shows.

Source: Bloomberg, Orchid Research

While we have been willing to turn tactically long on gold and silver to play the positive swing in the macro environment (weaker dollar, weaker US real interest rates), we prefer to remain cautious toward PLTM for now.

Our view is that the increase in investment demand for platinum, albeit significant, is insufficient to offset the weakness in the automotive sector. The refined platinum market is due to post a large surplus this year, despite supply disruptions in South Africa – accounting for 80% of global production. In addition, the seasonality of platinum prices is unsupportive in Q4, leading us to wait a little longer before building long-term positions in PLTM.

Against this, we expect PLTM to trade between $7.70/share and $10.00/share over the next three months.

Source: Bloomberg, Orchid Research

About PLTM

PLTM, which was created in January 2018, is directly impacted by the fluctuations of platinum spot prices because the fund physically holds platinum bars in a London vault and custodied by ICBC Standard Bank.

The investment objective of the GraniteShares Platinum Trust is to replicate the performance of the price of platinum, less trust expenses (0.50%), according to the official GraniteShares’ website.

The physically-backed methodology prevents investors from getting hurt by the contango structure of the platinum market, contrary to ETFs using futures contracts.

Also, the structure of a grantor trust protects investors since trustees cannot lend the platinum bars.

PLTM is the lowest-cost ETF on the market, with an expense ratio of 0.50%. PLTM competes with the Aberdeen Standard Physical Platinum Shares ETF (PPLT), which was created in October 2010, which is, however, more expensive considering that its expense ratio is at 0.60%.

Speculative positioning

Chart Description automatically generated

Source: CFTC, Orchid Research

The speculative community cut by the equivalent of 61 koz their net long exposure to NYMEX platinum in the week to October 6, according to the CFTC.

The net spec length in NYMEX platinum is at its lowest on the year, pointing to an increased bearish sentiment toward the precious metal.

Platinum’s spec positioning has become very light, with the net spec length at just 17% of open interest, well below its all-time high of 74% of open interest.

The current NYMEX platinum price (the red dot in the below chart) looks fairly valued based on the positive relationship between prices and spec positioning since 2015.

Source: Bloomberg, Orchid Research

Implications for PLTM: Given the current bearish spec sentiment toward NYMEX platinum, PLTM is vulnerable on the downside in the very near term.

Investment positioning

Source: Orchid Research

ETF investors added 37 koz of platinum to their holdings in the week to October 9, according to our estimates. This marked the 4th straight week of inflows and the largest increase over the past 6 weeks.

In contrast to the bearish sentiment among the speculative community, ETF investors seem bullish toward platinum. We think that ETF investors are long-term investors willing to take advantage of the relatively low historical price of platinum. The Pt/Pd ratio is close to a historically low, which is likely to mean-revert over the next decade.

Source: Bloomberg, Orchid Research

However, a bearish interpretation of the rise in platinum ETF holdings is that it is essentially a reflection of the magnitude of the surplus in the refined platinum market. This bearish interpretation is consistent with the negative relationship between platinum ETF holdings and platinum prices since 2009, as can be seen below.

Source: Bloomberg, Orchid Research

Based on this relationship, the current NYMEX platinum price (the red dot) looks a little bit expensive.

Implications for PLTM: Despite healthy investment demand for platinum, the refined platinum market is in a material surplus this year, reflecting the contraction in automotive demand and the decline in jewelry demand. As a result, PLTM may experience more pain in the very near term.

Closing thoughts

Despite the recent rebound in the precious metals space, platinum has performed the weakest, comforting our view to remain cautious toward PLTM in the near term.

Although spec positioning is light and investor demand is healthy, we think that platinum prices may continue to struggle due to the material surplus in the refined market this year.

As a result, we prefer gold and silver to express our bullish view on precious metals for now. In case of a notable dip in PLTM in Q4 this year, we may intend to build strategic a long-term position in this ETF.

We continue to believe that PLTM remains a great buying opportunity in the long run.

Trade with caution.

 


Read the full article at:  https://seekingalpha.com/article/4379110-pltm-weekly-waiting-for-weakness-in-q4

 

 

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