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Platinum and palladium had a thrilling start to 2010 on the expectation and then reality of a US-based exchange traded fund, says a report from Fortis Bank Nederland – The Metals Monthly January 2010.

Platinum, trading at just $1,399/oz on 28 December, reached $1,627/oz by 20 January, a rise of 16%. Palladium saw an even more explosive rally, rising from $352.50/oz on 22 December to $462/oz by 20 January, an increase of 28%. This was its highest fixing since July 2008, when the price was coming down from the spike higher caused by South African electricity shortages.

Short term outlook on platinum and palladium

If our projections for ETF demand are correct, we will see more buying in the next few months. This should support prices; however investors will need a compelling story to maintain their interest and so car sales, particularly in the US (for palladium) and Europe (for platinum) will be key. At recent levels a lot of good news from both appears already priced in. Short-term London fix, platinum: $1,475/oz-$1,600/oz, palladium: $400/oz-$475/oz.

What kind of impact will the US ETFs have?

After a nine-month wait, physical metal platinum and palladium exchangetraded funds (ETFs) were launched in the US on 8 January by a subsidiary of UK-based ETF Securities. Trading on NYSE Arca, the two products are called the ETFS Physical Platinum Shares (share code PPLT) and the ETFS Physical Palladium Shares (PALL). In their first 11 days of trading the platinum product acquired 194,000 oz of metal, and the palladium product had just short of 400,000 oz. This compares well to the already existing products, the UK ETF Securities and the Swiss ZKB, which collectively at the end of 2009 held 676,787 oz of platinum and 1,163,302 oz of palladium. But they have been in operation for nearly three years; it took the UK ETFs 40 (for platinum) weeks and more than two years (for palladium) to match the figures that the new US product has already managed. Trading volumes are higher still.

This bore out the confidence of the bulls, who had anticipated the launch of US PGM ETFs to boost the price. The thinking behind this is the larger size of the US domestic investment market, and, more crucially, the experience in gold and silver ETFs, where there are already US products. In gold the three US gold ETFs (SPDR Gold Trust, iShares and ETF Securities) at the end of 2009 held 1,222 tonnes, 2.6 times the holdings of the five European gold ETFs (ETF Securities, ZKB, Gold Bullion Securities – now owned by ETF Securities – Julius Bauer, and Xetra-Gold). In silver, the two US funds (BGI iShares and ETF Securities) hold 9,800t, 3.8 times the holdings of the two European (ZKB and ETF Securities).

If we assume the PGM ETFs do as well relative to their European cousins as the US gold ones have, say an average ratio of 3.2, it would suggest the US ETFs should eventually accumulate 2.2 Moz of platinum and 4 Moz of palladium. Given that annual supply/demand for both metals is around 7 Moz, these are big numbers. But there are reasons to think such estimates are too high. In silver the BGI iShares ETF enjoyed first-mover advantage, being launched a year before the two European ETFs. The ratio in the period all three have been launched has been a smaller, 2.1 times. In gold there was a UK ETF before the US ETF, but the Swiss/German ETFs post-date it, and in 2009 the ratio of inflows was a lower, 2.2 times. Furthermore, in gold there are ETFs outside Europe, which is not the case in PGMs; if we include their offtake over the year the ratio of US/rest of the world is a slightly lower 1.9. Using this ratio we might expect the US fund to eventually hold 1.35 Moz of platinum and 2.3 Moz of palladium.

This is supported by another method of estimating likely US PGM demand, by studying the most successful investment/speculative products that are currently available in the US for all four metals, the futures’ markets on Nymex and Comex. The most obvious measures of size for those markets are open interest – the number of contracts outstanding – or the non-commercial net long position, the standard measure of speculative interest. In terms of ounces, platinum is the smallest, both in terms of open interest and in terms of non-commercial net long. Palladium has volumes 1.4 to 1.5 times bigger, reasonably similar to the ratio of the two PGMs’ ETF holdings (1.7). Gold is between 30 and 45 times larger; silver is between 243 and 564 times bigger.

If we average the two ratios and assume that was to pertain between the US platinum ETF and the existing US gold ETFs, which have 39.2 Moz, then it would imply that the US platinum ETF should see overtake of 1.1 Moz and the palladium ETF 1.5 Moz. If we use the US silver ETFs, which have 31.5 Moz, it would imply 780,554 oz in the platinum ETF and 1.1 Moz in the palladium ETF. This is a lower projection for the PGM ETFs than obtained by our first method of extrapolating from the current European PGM ETFs.

There is a good reason why our first method might overstate likely offtake. US investors can already purchase the UK and Swiss ETFs. Both products have been around for more than two and a half years, giving ample time for investors to become aware of them. So although the ratio of likely US demand to European demand might indeed be about two, some of the likely US demand might have already been satisfied by the European ETFs. Indeed, at the extreme all US demand might be satisfied by the European ETFs; in which case the only impact of the US launch would be in each product’s market share. However this is not that likely – instead we expect the US PGM ETFs will expand the market, for this is what happened in gold. The first gold ETFs were not in the US but Australia and the UK, and these had acquired 57t (50 in the UK, 7 in Australia) by the end of October 2004. In November 2005 the US SPDR ETF was launched; by the end of that year it had 104t, nearly double the previous holdings of the UK/Australian ETF, which fell by just 3t to 54t.

Combining our two methods might suggest an approximation of demand for the US platinum ETF of about 0.9 Moz and for the US palladium ETF 1.2 Moz, but perhaps 200,000 oz and 300,000 oz respectively of that projected demand will already be held in the European ETFs. This might or might not be transferred over in due course, but it means global offtake will be in the order of 1.35 Moz of platinum and 2 Moz of palladium, of which half has already been satisfied. So additional demand caused by the US ETFs will be in the region of 650,000 oz of platinum and 0.9 Moz palladium. This is in essence a doubling of current ETF holdings.