platinum, palladium

Platinum Group Metals – A Quiet Storm Brewing

  • Platinum looks to challenge resistance.
  • Six years of a platinum deficit.
  • Look for the platinum discount under gold to narrow.
  • Palladium is the most volatile precious metal.
  • PGMs are industrial precious metals.

Platinum and palladium have posted gains so far in 2017 alongside their precious cousins, gold and silver. Platinum and palladium are not only precious but they are industrial metals. The rarity of the platinum group metals puts them in a class by themselves.

With a high resistance to heat and high density these rare elements have a myriad of industrial uses. They clean poison from the air we breathe in automobile catalytic converters. Their high melting points make them the perfect metals for catalysts in oil refineries. Then there are the medical applications in imaging and certain chemotherapies. However, when it comes down to the path of least resistance for the prices of platinum and palladium it is investment demand that ultimately determines if they appreciate or depreciate each year.

Compared to gold and silver, the markets for platinum and palladium are much smaller. Therefore, the supply and demand characteristics of these markets can cause wild price swings at time. While they tend to move higher or lower in sympathy with gold and silver, sometimes they decide to move on their own. Palladium traded to an all-time high in early 2001 when the metal hit $1,009 per ounce. Platinum reached its all-time peak in 2008 at $2,308.80. When these platinum group metals hit their highs, gold was trading at a considerably lower price than its current levels. Sometimes the PGMs follow their precious cousins and sometimes they do not. However, as industrial commodities it may be only a matter of time before platinum and palladium shine brighter than gold and silver and we could be on the verge of seeing that type of price action sooner rather than later.

Platinum looks to challenge resistance

Platinum has been going along for the ride in the precious metals sector so far in 2017.

platinum daily chart
Platinum daily chart (source: CQG)

As the daily chart highlights, the price of platinum has been moving steadily higher since trading below $900 per ounce in late December 2016. Last week, platinum moved to a high of $1,032.10 above the technical resistance on the daily pictorial that stood at the November 9 highs at $1,026.40 per ounce. Open interest, the number of open long and short positions on NYMEX platinum futures has been gently increasing. The momentum indicator, the slow stochastic, has risen to overbought territory. The move higher has been so slow and deliberate that daily historical volatility has dropped to 10.86%, a variance more appropriate for a currency than a volatile rare precious metal. Platinum tried the downside, falling to lows of $993.10 last Friday on sector wide selling in precious metals but like its cousins, it recovered and closed at the $1,012 level on the April NYMEX futures contract.

platinum weekly chart
Platinum weekly chart (source: CQG)

The weekly platinum chart displays a stronger uptrend that portrays a higher potential for the commodity to continue to post gains above resistance over the weeks ahead. Technically, platinum looks ready to move higher and fundamentals support a higher price for the industrial and precious metal.

Six years of a platinum deficit

We wrote a piece for our readers back in December, when the price of platinum was flirting with the $900 per ounce level. In that article we outlined a discussion with the research director of the World Platinum Investment Council and came to the conclusion that despite a fundamental deficit in the platinum market, investors have ignored the precious metal. Markets like platinum go higher only when investment demand causes buying. Given relative performance, investors who might be willing to dip a toe on the long side of the platinum market have decided that they get more bang for their investment buck from gold or silver during bull market periods. Moreover, with a higher degree of liquidity in the competing precious metals has made platinum a less desirable investment vehicle.

Meanwhile, there will come a time when the industrial characteristics of platinum, the deficit, and the price history will lift the price of platinum out of its malaise. After all, platinum has not traded at a premium to gold since 2014 and that it is not the norm for a commodity that has a nickname, rich man’s gold.

Look for the platinum discount under gold to narrow

Platinum’s price performance has been pretty lousy for a commodity that is ten times rarer than gold. In 2008, platinum traded at over a $1,200 premium to the yellow metal. Since then, the trend has been lower and in 2016 it traded to the lowest level in modern history against gold; almost a $360 discount when a frenzy of buying in gold and silver in the wake of the Brexit ignored platinum and its positive fundamentals.

platinum futures
NYMEX platinum futures minus the price of COMEX gold futures (source: CQG)

The weekly chart of the price of NYMEX platinum futures minus the price of COMEX gold futures illustrates the weakness of platinum when compared to gold. In December 2014, platinum commanded a small premium but since then it has been all downhill.

Inter-commodity spreads are great indicators of value particularly when comparing one commodity to another than can be used as a substitute. Platinum’s higher density and melting point to gold make in a preferable metal for many applications but when it comes to investment demand, coinage, jewelry and many other uses the two precious metals can be interchangeable. On a historical basis, over the past four decades, platinum has traded at a premium to gold for many years and the median level of its premium has been between $100 and $200 per ounce. Therefore, based on historical trading patterns platinum is cheap, on a value basis, when compared with gold these days.

After trading at all-time lows against its precious cousin in late June, platinum moved to a $170 discount in August and since then it has been trading from a $250 to a $200 discount. The price relationship has been in consolidation mode over recent months. One of the things that I have learned trading commodities for almost four decades is that while it may take months or in some cases years, fundamentals eventually move markets to levels that reflect supply and demand fundamentals. Mean reversion in the spread and a deficit in the platinum markets make a strong case that platinum will eventually outperform gold. Another thing that I have learned is that in less liquid markets, price corrections tend to happen quickly with a violent price move. Therefore, there is a great chance that waiting for platinum to once again become rich man’s gold will be well worth the wait. Platinum closed at a $222 discount to gold last Friday.

One of the signs that the patient platinum buyers and holders may not have to wait all that long for mean reversion is the recent price action in another PGM or platinum group metal, palladium.

Palladium – the most volatile precious metal

Price variance in palladium has picked up over recent months. In 2016, all eyes were on gold and silver but palladium wound up the best performing precious metal posting an almost 21% gain on a year-on-year basis. Over recent months, palladium volatility has picked up and the precious metal has been making higher lows and higher highs since the very beginning of 2016.

palladium weekly chart
Palladium weekly chart (source: CQG)

As the weekly chart of NYMEX palladium futures illustrates, the price has been trending higher in volatile fashion and historical volatility at over 40% is the highest of all of the precious metals. Weekly historical volatility in gold is at 11.95%, in platinum it is at 20.57% and in speculative silver the metric only stands at 17.12%.

palladium daily chart
Palladium daily chart (source: CQG)

When the price of a commodity becomes very volatile, it often portends a huge move. Given the price pattern in the least liquidly traded precious metal, it feels like palladium is gearing up to take out the $800 level and move higher to challenge all-time highs of $1090 per ounce established back in early 2001. After all, we are currently in an environment where industrial commodities are posting impressive gains.

PGMs are industrial precious metals

Over the past year, we have seen a reversal for many industrial metals, minerals, and commodities. The price of oil has doubled on a year-on-year basis. Base metals prices are significantly higher than they were last year at this time. Iron ore, a ferrous metal has doubled and shipping rates are more than 100% higher today than they were in February 2016. Most recently, the price of lumber, another industrial commodity that is a critical ingredient in construction and building has rallied to the highest price since early 2014. The prospect for infrastructure rebuilding in the U.S. and fiscal stimulus in the world’s richest nation has lifted the prices of many raw materials. Moreover, that stimulus is likely to cause inflationary pressures to rise which is fundamentally bullish for all commodity prices.

Platinum group metals (PGMs) are precious and industrial commodities. We learned in 2016 that while platinum was less precious than gold and silver, palladium turned out to be more precious. When it comes to their industrial role, the properties of the PGMs put them in a class by themselves when it comes to their many applications.

Historical price relationships and the recent volatility in palladium are signs that a quiet storm is brewing in the platinum and palladium markets. As these metals tend to be a lot less liquid than gold and silver, watch out. When they start to move it will be very hard to hop on board and get long.

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