We track the Commitment of Traders report in four major domestic metals markets – gold, silver, platinum and copper. Currently, the commercial trader category is roughly bullish on the lot of them. Very rarely do we see all four metals markets telling us the same thing. While the markets may seem similar, their uses in both industry and investing provides each of the four with subtle nuances and slightly negative correlations that keep them from syncing up very often. Currently, the commercial long hedgers, the ones who take metal off the market for use in finished products or locked up in investments feel that the platinum market is a nearing bargain levels as it hasn’t traded this low since 2009.
The platinum market has waffled along since the Japanese
tsunami and earthquakes of March 11th and is currently undervalued
by a number of measures.
Initially, the platinum market sold off hard as industrial demand for
automakers came to a screeching halt. Japanese auto production was cut by more
than half and was just beginning to come back online four weeks ago. It is very
reasonable to expect that Japan’s outright auto production may be cut by more
than 10% for 2011. This uncertainty has placed the platinum market in a state
of limbo for the last two months.
There are several clues pointing towards higher prices for
platinum. The first group to step in and provide a floor was the commercial
traders. The advantage of following the commercial traders is that they all
derive their valuations individually. Their actions as a group, reported to the
Commodities Futures Trading Commission, allow us to view their collective
consensus. Their analysis showed that platinum below $1,700 per ounce was a
screaming bargain. They increased their collective net long position by more
than 100% in two weeks. Commodity fund managers and commodity trading advisors
are following the commercial traders’ lead and have now repurchased the
positions they sold off during the market’s post nuclear free fall in March.
Platinum’s relative valuation to other precious metals is
also a good indicator of value. I think everyone would agree that platinum is
more expensive than gold. After all, gold production is measured in metric tonnes
while platinum’s production is measured in ounces. Yet, March’s decline brought
the price of platinum to within $239 of the price of gold. That is a premium of
1.15 times the value of gold for a market that is 36 times the size based on
2010’s production numbers. The average annual low value for this differential
is 1.52. This means that the closest platinum has been to gold in each of the
last 10 years is 1.52 times the value of gold. Gold at $1,000 per ounce equals
platinum at $1,520. Conversely, the average high in each of the last 10 years
is platinum trading at twice the value of gold. A reversion to the lows of this
spread brings platinum back up to $2,356 per ounce while a move to the highs of
this spread would take platinum to more than $3,000 per ounce.
Finally, Japanese auto manufacturing will come back on line.
Furthermore, the increase in automotive production from India, China and Russia
which all use platinum technology in their catalytic converters will not only
support the market but, add new demand going forward. Remember, China now
produces more cars than the U.S. Japanese auto manufacturing uses approximately
.054 ounces of platinum per vehicle. Based on their annual production of 9.5
million vehicles, this equals about 8.5% of global platinum production. China
and India both saw vehicle production increases of more than 25% last year and
based on their extremely low per capita vehicle ownership rates and healthy
economies, there’s no reason their increases won’t continue for some time to
Finally, the U.S. government’s low emission vehicle mandate
to put 10 million new fuel cell equipped vehicles on the road by 2025 has
continued to place solid demand on platinum through it’s use in batteries and
fuel cells. The government money being funneled into inefficient technology is
pulling platinum from the market at a rate of 10 times the conventional auto
industry on a per unit basis.
Whether platinum is viewed as an outright value investment
or as a relative investment to other precious metals it ought to be considered
as a small percentage of one’s portfolio. Outright platinum ownership is the
most risky route with support expected somewhere around the $1,700 area while
the platinum spread against gold would afford some directional protection while
still maintaining the ability to participate in platinum’s out performance of
gold as it climbs back to its historical trading levels.
This blog is published by Andy Waldock. Andy
Waldock is a trader, analyst, broker and asset manager. Therefore, Andy
Waldock may have positions for himself, his family, or, his clients in
any market discussed. The blog is meant for educational purposes and to
develop a dialogue among those with an interest in the commodity
markets. The commodity markets employ a high degree of leverage and may
not be suitable for all investors. There is substantial risk of loss in
investing in futures.