PPLT: Dead Money Can Come Back To Life (NYSEARCA:PPLT)

In a September 3, 2023, Seeking Alpha article, I concluded:

Platinum remains the weak link in the precious metals sector, but every dog eventually has its day. The supply-demand deficit, BRICS production domination, and rising demand are compelling reasons to own platinum. Investing in platinum requires patience and perseverance, as it has been dead money for years.

On September 1, nearby NYMEX platinum futures were trading at $968.70 per ounce. In late October, the price was just over $900 per ounce as the rare metal continues to be dead money and a weak link compared to gold. Platinum has tested investor patience and perseverance for years, and it continues to be a financial thorn in portfolios in late 2023.

Platinum has been going nowhere fast, trading in a mostly sideways bearish pattern for nearly a decade

Platinum reached a new low for 2023 in October when the price of the nearby NYMEX futures contract fell to $850.50 per ounce. This year’s high came in April at $1,129.80 on the continuous futures contract.

As the twenty-year chart illustrates, platinum fell from the 2008 record $2,308.80 high to a low under $600 per ounce in March 2020. The 2020 bottom was a spike low during the beginning of the pandemic that caused a tidal wave of selling in markets across all asset classes. For over three years, $800 has contained selloffs on the downside, with the price remaining below the $1,300 level. While $1,050 is the average level, platinum futures have spent most of the time below the $1,000 per ounce level.

Gold has been rallying – The platinum-gold spread is at a record low

The May 2023 $2,072 high on the nearby COMEX gold futures contract was a double top formation as the futures reached precisely that level in March 2022. The failure to reach a higher high led to a correction that took the continuous gold futures contract below $1,810 per ounce in early October 2023.

Gold fell, reaching a low on October 6. The October 7 terrorist attack in Israel caused gold futures to turn higher, rallying to nearly $2,000 in late October and probing above that level on the nearby December futures contract.

A close above $1,950 per ounce on October 31 will establish a bullish key reversal on the monthly gold futures chart, which could lead to new record highs above the $2,072 technical resistance level. Gold is the leading precious metal. While platinum’s nickname was “rich person’s gold” for decades because of its rarity compared to gold, it has not lived up to that moniker in a decade.

The platinum-gold spread measures the relationship between the precious metals.

The chart of continuous NYMEX platinum futures minus the continuous COMEX gold futures shows platinum’s premium rose to a record high at over $1,200 per ounce in 2008 when platinum prices peaked. Since then, platinum has lost its luster versus gold, with the spread making lower highs and lower lows. At around a $1,075 discount for platinum under gold on October 26, the spread is sitting near a record low, and the bearish trend remains intact, with platinum underperforming gold for the past decade and a half.

A growing platinum deficit – Investors do not seem to care

In September 2023, the World Platinum Investment Council reported a 2.2% larger platinum supply deficit than previously expected for 2023 at a record one million ounces. Growing requirements and flat supplies drove the shortfall between supply and demand.

Catalytic converter, jewelry, and glassmaking demand has grown 27% to 8.2 million ounces in 2023, while supply remains at 7.2 million ounces, the same as in 2022. Platinum supplies have not increased because of ongoing electricity shortages in South Africa, the world’s leading producer.

The WPIC expects automotive and industrial consumption to deplete above-ground stocks in 2024, likely increasing the fundamental deficit next year. Meanwhile, the price action tells us that investors have ignored the supply-demand deficit, with platinum sitting just above $900 per ounce on October 26.

The chart highlights the bearish pattern of lower highs and lower lows over the past months. Since peaking at over $1,100 in May, platinum futures fell below $860 per ounce. The price was not far above the low in late October as a stable U.S. dollar, and the rising interest rates have weighed on the price. This week, the U.S. 30-year Treasury bond futures fell to the lowest level since 2007. Higher rates increase the cost of carrying commodity inventories. The dollar is the international pricing benchmark for most commodities, and platinum is no exception. A higher dollar increases the cost of platinum in other currencies, weighing on the demand.

Meanwhile, investors have shunned platinum despite the fundamental deficit. Trend-following traders have no reason to purchase the metal, given its bearish trend and underperformance compared to gold for years.

Platinum comes primarily from the BRICS countries – Investors ignore the potential for significant supply issues

The total annual platinum production of 7.2 million ounces equates to 224 metric tons.

As the chart shows, South Africa produced 62.5% of the world’s platinum in 2022, with Russian output accounting for 9%.

The bifurcation of the world’s nuclear powers, the wars in Ukraine and Israel, and tensions between the U.S./Europe and China/Russia may only exacerbate platinum’s supply shortage in 2024. While China is the leading platinum-consuming country, Europe and the U.S. are second and third. Since over 70% of the world’s annual platinum supplies come from BRICS countries, the tensions could lead to supply disruptions or even trade embargos. BRICS countries are moving towards a BRICS currency, challenging the U.S. dollar for cross-border trade. Sanctions on Russia and trade restrictions on China have caused them to seek alternatives to the U.S. currency. Since China is the world’s second-leading economy, a BRICS foreign exchange instrument could diminish the U.S. dollar’s reserve currency role. When it comes to platinum, the tight fundamentals and production from BRICS countries may only exacerbate supply concerns, leading to higher prices.

Moreover, platinum is a thinly traded precious metal. On October 25, COMEX gold’s open interest was 467,547 contracts, representing 46,754,700 ounces worth over $93 billion at $1990 per ounce. NYMEX platinum’s open interest at 81,905 contracts reflects 4,095.250 ounces worth $3.72 billion at $908 per ounce. The 2022 annual gold mine supply of 3,100 metric tons was 13.8 times higher than platinum production.

The bottom line is that platinum is a thinly traded futures market, which could lead to significant volatility if the price turns higher. Low liquidity creates an environment where prices can rise or fall to illogical, irrational, and unreasonable levels that defy fundamentals. While platinum has been under pressure for years, the potential for a sudden and violent upside move remains a clear and present danger, given the supply-demand equation, BRICS production dominance, and gold’s price appreciation.

Limited downside and a potential for an explosive upside with the PPLT ETF

If platinum will resume its previous position as “rich person’s gold,” the current price is a bargain. Risk-reward favors the upside, making platinum highly attractive in the current environment.

The most direct route for platinum investment is via the physical market for bars and coins. However, physical platinum investment involves significant premiums to the spot or futures price because of the limited supplies.

NYMEX futures are another investment avenue as they converge with spot prices during delivery periods as the exchange offers a physical delivery mechanism. Each NYMEX contract contains 50 troy ounces of platinum.

The fund summary for the abrdn Physical Platinum Shares ETF (NYSEARCA:PPLT) states:

At $83.14 per share on October 26, PPLT had around $870 million in assets under management. PPLT trades an average of 68,729 shares daily and charges a 0.60% management fee.

I continue to be a very frustrated platinum bull. However, I will add to long positions on further price weakness as the fundamental deficit, and BRICS production dominance is a potentially bullish cocktail for the metal long overdue for an explosive rally. Leave room to add, as picking bottoms in any market is dangerous. Platinum is cheap compared to gold, and its low liquidity could make a rally over the coming months and years explosive.