The Bullish Set-Up In Platinum

By Aaron Levitt | November 20, 2013

The last year hasn’t been kind to the precious metals sector. As the recovery has taken hold, gold, silver and a host of other metals have lost their luster. Many of the factors that pushed them to lofty heights, higher inflation expectations, a weakling dollar etc., have materialized in the medium term. That prompted investors to flee the sector in spades. The popular SPDR Gold Shares (NYSE:GLD) has seen its assets under management fall significantly since the start of the year.

However, the recent price drops could spell a bargain in at least one of the precious metals. That would be platinum.

Things are looking up for the platinum group of metals as a variety of conditions are pointing to a bullish time ahead. After the price drop, now could be the best time to snag up the metal and its producers.

A Huge Supply Deficit

Despite the recent price drop, there’s plenty to be bullish about when it comes to rising platinum prices. Aside from its precious metal moniker, the platinum group metals (PGM) is more about industrial production than just being a store of value. Finding their way into everything from catalytic converters and coal emissions equipment to LCD monitors and hard disk drives, platinum demand is surging. According to precious metals refiner Johnson Matthey’s (OTCBB: JMPLY) latest PGM review, gross demand for platinum could hit a record 8.42 million ounces this year. That’s up 4.8% versus last year’s demand. Investment demand alone is set to rise 68% to a record 750,000 ounces.

Meanwhile, things aren’t looking too good from a supply stand point.

The bulk of the world’s platinum- and its sister metal palladium- is mined in South Africa. Unfortunately, the nation is still undergoing various labor strikes at its PGM mines. Those strikes have been actually quite bloody, with riots and deaths being reported. With South Africa's National Union of Mineworkers preparing for a possible strikes against top producers- like Anglo American Platinum (OTCBB: AGPPY) and Impala Platinum (OTCBB:IMPUY) –analysts estimate that at least half of global output of platinum and palladium could be at risk.

These factors prompted Johnson Matthey to estimate that platinum will see a supply deficit of around 605,000 ounces. That’s the third year of supply deficits and the largest since 1999. Meanwhile, the firm also predicts another year of deficits for the palladium market. Overall, these supply constraints in the face of rising demand should push prices up for platinum and palladium to $1580 and 815 an ounce, respectively.

Making A Platinum Play

Given that this is the third year of supply/demand issues for the metal, higher PGM prices could be coming to the market. More importantly, platinum’s 24% drop since the beginning of the year offers a great entry point to play that rise. Investors may want to bet on the sector.

The easiest way to do so is though the physically backed ETFS Physical Platinum Shares (NASDAQ:PPLT). The exchange traded fund holds platinum bullion in a vault and allows investors to directly track the price of the white metal. PPLT charges just 0.60% in expenses and sit closer to its 52-week low than high. Likewise, fund sponsor ETF Securities also has a physical fund that tracks palladium- the ETFS Physical Palladium Shares (NASDAQ:PALL). Investors looking to use futures to get their platinum metals fix can use the iPath DJ-UBS Platinum ETN (NYSE:PGM).

Another interesting choice could be the Sprott Physical Platinum and Palladium Trust (NASDAQ:SPPP). As a closed-end fund (CEF), SPPP can trade at either premiums or a discount to its net asset value. Currently, the fund is at a 1.55% discount to underlying holdings of physical bullion. That means investors are able to buy platinum at even cheaper prices than spot.

Finally, as with gold and silver, investors can gain additional leverage by betting on the miners of platinum. For a broad bet, the First Trust ISE Global Platinum Index (NASDAQ:PLTM) can be used. However, North American Palladium (NYSE:PAL) and Stillwater Mining (NYSE:SWC) have seen their share prices dwindle as the precious metals fallout has taken place. Yet, the pair offer a chance to participate in the growth of the domestic mining sector- far away from the ills facing South African miners.

The Bottom Line

The recent precious metals rout has unearthed plenty of bargains. One of the biggest could be in platinum. Analysts predict another year of supply constraints in the face of rising demand. For investors, the time to pounce on platinum could be now. The previous picks make ideal choices to play the metals rise.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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