Fundamentals Favour Platinum Group Metals

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By Chris Shaw

Precious metal prices rose in the first quarter of 2010 but as Barclays Capital notes there was a split in terms of relative performance, with the platinum group metals outperforming gold and silver.

According to Barclays, this reflects in part the relatively stronger fundamentals of the platinum group metals, as US motor vehicle sales rose 22% year-on-year in March. Standard Bank agrees, noting the improvement in US auto sales is providing additional support to an already strong Chinese auto market.

Market analysts at Oakvale Capital point out this increased auto sector demand has been noticed, causing investors to return to the platinum group metals end of the market. As evidence of this, Oakvale notes palladium this week hit a two-year high above US$500 per ounce, while platinum is also at its highest level since August of 2008.

A key for Barclays is while both the precious metals and platinum group metals are also subject to investor flows, these have been far more positive for the platinum group metals. In the first quarter of 2009 inflows for gold were a record thanks to safe haven buying and market uncertainty, but both factors have been scaled back in each month of 2010.

In contrast, the launch of physically-backed platinum group metal ETPs or Exchange Traded Products in the US has seen strong growth in investor demand for platinum and palladium. As an example, Barclays points out first quarter inflows for palladium hit 546,000 ounces, more than the total inflows of 2009. Platinum holdings in the March quarter were just 3,000 ounces below their peak.

This relative difference in performance between the precious and platinum group metals should continue according to Commerzbank, as increasing economic optimism is a negative for gold as investors exit safe haven assets to invest in more risky asset classes. This trend appears underway, Commerzbank noting in March net long positions for gold on COMEX declined by more than 30,000.

As well, Commerzbank points out metals such as silver, platinum and palladium benefit from economic optimism as unlike gold they have a greater use in industry. The other point made by Commerzbank is there continue to be some supply side issues for the platinum group metals. These stem from the potential for shortages in power supply in South Africa, which is the major producer of these metals.

Standard Bank suggests both platinum and palladium should be bought on any price dips, with palladium preferred on a relative basis. For platinum support remains at US$1,660 per ounce, while the next major resistance level is US$1,700 per ounce. For palladium Standard Bank suggests resistance is currently at US$500 per ounce and US$508 per ounce, while support stands at US$485 per ounce.

As UBS points out, both these resistance levels were taken out over the Easter period as light trading conditions meant little in the way of any resistance to prices moving higher. While there may be selling in subsequent days as more traders return, UBS expects any price dips will be well supported given the strong fundamental outlook from increasing auto demand.

Compared to the positive outlook for the platinum group metals, Standard Bank suggests with a renewed focus on possible monetary tightening and with the US 10-year treasury yield at 4% gold may find it harder to move higher. As a counter it suggests physical demand should still support the metal, so limiting any downside.

Standard Bank suggests resistance for gold is currently at US$1,132 per ounce and US$1,139 per ounce, while support currently stands at US$1,118 per ounce and US$1,111 per ounce.

Stocks offering exposure to platinum and/or palladium on the Australian share market include Platinum Australia (PLA)), NiPlats Australia ((NIP)), Platina Resources ((PGM)), Aquarius Platinum ((AQP)) and Zimplats ((ZIM)).

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