Will Shorting Platinum Be Profitable?

August 28, 2009 | By | Reply More

Strikes continue to hit Impala Holdings for the third day running at their Rustenberg mine, the worlds largest Platinum mine as the company announces an annual net income drop of 65% for the year ending in June. Impala Holdings is the second largest platinum producer in the world.

Meanwhile workers at the world’s largest platinum producer, Anglo Platinum Ltd., have rejected a revised pay offer so expect labor problems to continue. The longer term effect of the US ¨cash for clunkers¨ program remains to be seen with 700,000 gas guzzlers taken off the roads to be replaced mainly by Asian automakers.

The question remains how much will US auto sales suffer in the months to come now that the artificial stimulus has been removed. As other countries have followed suit to artificially stimulate their own auto buying market it would not be unreasonable to expect sales in the aftermath to drop relatively sharply, even more if the green shoots beginning to show in some economies become withered and parched of consumer spending.

Clearly the principal price driver of platinum, rhodium and palladium is the use of the metals in catalytic exhaust systems by the auto industry. So what next for platinum?

Auto sales in China are still strong, but there are some indications that the Chinese economy is in bubble phase.

If this is so and the bubble bursts as it has done in the developed countries then expect Chinese auto sales to sharply contract, meanwhile sales in the rest of the world are hardly likely to expand. The result will not be good for the price of platinum nor for palladium and rhodium.

In January this year platinum hit a low of $920 an ounce and a high of $1280 an ounce at the beginning of August. It does not take a genius to relate these peaks and troughs to the pessimism of January and the optimism of early August.

Today the price is around $1235 an ounce and the technical analysts may tell you that the indications are that the price will continue to fall.

Read the runes as you will, but there are other good reasons to expect platinum and its associated metals to fall further, maybe back to January’s levels. When thinking about the market for metals used in catalytic converters it must never be forgotten that they can be and are recycled time and time again.

How many clunkers are having their catalytic exhausts recycled and sold back to manufacturers, let alone the normal day to day scrappers world wide?

What is the state of the auto manufacturers stockpile of platinum etc., and, right now, is it cheaper to buy the metals metal from the recyclers than from the miners?

We don’t know but are trying to find out.

If the economies of the world are truly moving out of the recession and China continues its impressive growth then we are looking at a totally different scenario.

Industrial unrest in South Africa will lead to higher cost of production while at the same time total world output is declining. If the demand is there it is obvious that the price must rise.

We do not think the price is likely to reach the dizzy heights of near $2300 an ounce as it did at the height of the euphoric economic bubble in March 2008 but $1500-$1600 seems an attainable longer term target if all goes well.

Another curious reaction has come from the world’s two largest platinum producers who say that they would not sell to an ETF backed by holdings of the physical metal. They used the argument that the physical metal would be taken away from consumption and therefore push the price up.

Their fear is that jewelry demand and industrial use would be damaged encouraging the development of cheaper alternatives.

Seems to us that selling to a platinum ETF could be a price saviour if the recession continues into a second phase and if economic and industrial activity resumes growth, then it should not be beyond the wit of the worlds two largest producers to balance supply and demand to the benefit of their shareholders and the platinum price!

We are not sure that this statement of intent can be taken seriously, after all it was made some time ago and so far the Platinum ETFs launched first in London (PHPT) and then the US have not reported any difficulty in purchasing the physical metal to lock away in their coffers.

Either way shrewd traders or investors will be given an opportunity to profit. At this moment in time, when trade is thin and the world outlook is still obscure we are staying out of the market. Our gut feeling is shorting platinum will turn out to be the profitable play.

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Category: Platinum Group Metals

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