Commodities & Metals

Speculators Run Platinum & Palladium Plays Ahead of ETF Launch (GLD, SGOL, PTM, PGM, SWC, PAL)

If you have ever wondered just how much exchange traded funds and exchange traded notes can run a market, you can forget about wondering how much the SPDR Gold Shares (NYSE: GLD) has helped to run gold prices higher.  Some will say it has, and some will try to dispute this notion.  While being able to speculate on any commodity and market is good, there is always a question of how much speculation by participants not tied at all to the underlying markets should be allowed.  ETF Securities is soon to launch two ETF products: one for platinum and one for palladium.  These markets are not as large as the gold market, so floods of money in and out of these could make for volatile underlying markets.

We have seen varying reports on the proposed size of these ETF products, so we are not going to cover the proposed sizes.  ETF Securities Ltd. already offers the ETFS GOLD TRUST (NYSE: SGOL) as a gold ETF rival, and plans to launch a platinum ETF and a palladium ETF.  Both are to be backed by the physical metals rather than just contracts and tracking instruments seen in other commodity-related exchange traded notes.  This has speculation rising in some of the names around these instruments.

BS E-TRACS Long Platinum Trust ETN (NYSE: PTM) has been around since mid-2008.  The problem is that it trades under 100,000 shares on more than 80% of its last 90 days.  iPath DJ AIG Platinum TR Sub-Index ETN (NYSE: PGM) has been around since late-Summer-2008 and also has thin volume, trading 100,000 or more in not even one-third of its last 90 days.  The PTM is up only 1.3% today at $19.39 and the 52-week range is $11.20 to $20.63; while the PGM is up 1.05% at $41.09 and has a 52-week trading range of $22.48 to $47.90.

Platinum’s top use is for catalytic converters in automobiles and in jewelry.  But it also has uses in lab equipment and other commercial applications.  Palladium is part of the platinum group metals and is softer than platinum and is used in eliminating harmful emissions produced by internal combustion engines, jewelry, dentistry, electronics, fuel cells and more.

There are more recent reports that vary, but the USGS said 239 tonnes of platinum sold in 2006.  Of this, some 130 tonnes were for auto emission control devices, about 49 tonnes for jewelry, 13.3 tonnes in electronics, 11.2 tonnes in the chemical industry, and the rest of tonnes in other applications.

Stillwater Mining Co. (NYSE: SWC) produced 9,770 kg of palladium and 2,950 kg of platinum in 2006 according to the same 2006 USGS report used to show the size of the market in recent years.  Guess whose shares are up 13% today and guess whose shares hit a new 52-week high today… Yep, Stillwater.  Shares hit a high of $12.19 and have already traded over 3.2 million shares versus an average volume of 921,000 shares.  Just five trading days ago this was not even a $9.00 stock.

North American Palladium Ltd. (NYSE: PAL) has also been on a tear and shares are up 8% today.  At $3.90 currently, it hit a 52-week high of $4.11 today as well.  Thomas Weisel recently initiated coverage on this one with an “Overweight” rating and shares were at $2.84 on that recorded day in December.  That is a 40% run since before Christmas.

It is good that investors will have more avenues to take part in the price moves of these underlying commodities.  It will just be interesting to see if these new ETF products really change the underlying demand for these metals.  Kitco.com lists the base prices as $1,138.70 for gold, but listed around $15,50 as the price for platinum.  Platinum at one point crossed under the price of gold as demand cratered from all sources during the recession.  And palladium was shown to have a price of about $425.00.  Historically, the price of platinum was often in-line with gold but rarely under it on a longer-term basis.  But the price of platinum has also exceeded twice the price of gold at other extremes.

I have yet to see anyone post much thought to this, but it seems very likely and very sensible that if the regulators like the CFTC have looked into instruments trading oil and natural gas, then there is no reason that the metals markets would be immune to scrutiny nor that they would be immune from trying to curb or regulate the size of speculative instruments.  Yes that includes gold.  And ditto for platinum if this instrument gets very large and if it is believed to cause major price moves in the underlying commodity.

JON C. OGG
January 6, 2010