Platinum & Palladium Trade Sharply Down

June 1, 2010 | By | Reply More

Both Platinum and Palladium traded sharply down in London this morning after the long weekend holiday on both sides of the pond.

The overriding reason appears to be investor misgivings over the strength of the so-called recovery. If, as seems at the very least a possibility, we drift back into the recession that this time will also encompass China, then automotive production will be amongst the first industries to suffer.

Both metals are primarily used in catalytic converters in exhaust systems so lack of demand from the auto industry, the principal driver of prices, is a given if, or when, auto manufacturers cut back.

We have brought the subject up on previous occasions in these columns that potential buyers into Platinum and Palladium should be aware that both metals are virtually 100% recyclable, catalysts do not suffer any chemical change.

Platinum is also in demand by the jewelry trade; again an economic downturn is not good news for jewelry sales with the metal yet again being subject to recycling if any volume of scrap jewelry becomes available as in the case of gold. As recycling is likely to take up a larger share of a diminishing market, and at a considerably lower cost than mining, we can expect the both PGMs (Platinum Group Metals) and their producers to be hit hard.

Furthermore we are of the opinion that the prices for Platinum and Palladium have been driven up by this year’s launch of ETFs holding the physical metals against shareholders purchases, bearing in mind that this is first opportunity for Joe Public to trade the metals on virtually a level playing field with the PGM specialists.

This is not a case of meeting immediate industrial or jewelry demand but more a perception by holders of shares in the ETFs that if the recovery is on track then the demand will be forthcoming.

There is no hard evidence that we are aware of that this market is driven by the same criteria as Gold, that is that the metals are a store of value and a hedge against inflation.

If we are correct in this assumption then we expect both the Platinum and Palladium ETFs to offload sharply as investors withdraw their support in the face of a return to the 2008  automotive slump situation when we saw Platinum at circa $1000 an ounce rather than today’s price around $1500 plus.

Buying put options on the ETFs (PPLT & PALL) may be of interest to the gamblers amongst us (we will be having a small dabble ourselves!), otherwise this seems a sector to steer clear of, or at least to be very, very wary of, depending on your aversion to risk.

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Category: Platinum Group Metals

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