Platinum used to be the king of metals. Once considered the “rich man’s gold,” platinum had more cachet. “Platinum” record albums sell more than gold ones. “Platinum plans” have more perks than “gold plans.” But why does platinum signify greater monetary prestige? Because platinum has been more valuable, and at times, significantly more valuable than gold.
Platinum is much rarer than gold. It is only found deep within the earth which makes it expensive and dangerous to mine. All the platinum ever mined would fit into a reasonably-sized living room. What’s more, platinum has the highest density, melting and boiling point of all the precious metals. These characteristics make platinum extremely useful in many industrial applications, including catalytic converters.
As the chart above illustrates, the historical relationship between platinum and gold has changed. Platinum has fallen off a cliff in comparison to gold. It has declined from a premium of $1,144 per ounce in 2008 to a discount of nearly $500 per ounce as of last week’s close. Platinum is the “rich man’s gold” no more.
What’s wrong with platinum? The combination of a weak South African rand and the decision by most major automobile makers to substitute cheaper palladium for more expensive platinum has certainly taken its toll. The vast majority of platinum is produced by South Africa and priced locally in rand. A weak rand means it takes fewer dollars to buy an equivalent amount of rand, pressuring the dollar price of platinum in the process.
Catalytic Converters Critical to the Price of Platinum
Perhaps even more influential was the decision by the world’s automakers to use palladium rather than platinum in their catalytic converters due to palladium’s once-huge price advantage. The chart below shows the price of platinum minus the price of palladium. In 2008, platinum cost nearly $1,600 per ounce more than palladium. It now costs $491 less, shifting the cost advantage back to platinum in a big way.
Automakers dumped platinum because of its high cost. One wonders what it will take to get them to switch back, especially since platinum’s superior qualities mean it takes less of it to make a catalytic converter. It is our belief that automobile manufacturers continue to use palladium because of the tooling costs associated with going back to platinum. Judging from the chart below, the economics of switching back to platinum are starting to make a lot of economic sense. If and when car-makers make the switch, platinum could soar.
Platinum’s high temperature tolerance means it is still used in catalytic converters, but only where palladium cannot be used, such as diesel-powered vehicles. The Volkswagen cheating scandal of 2015 decimated the market for “environmentally friendly” diesel-powered automobiles and was a major cause of the current down-leg in the chart below. This scandal also occurred right around the time the price of platinum dipped below the price of gold. (See chart above.) Platinum has yet to recover.
But this could be changing. Platinum’s discount to palladium has now reached 2001 levels. We do not believe it will remain here much longer. A move similar to the one that took platinum from a huge premium in 2008 is not only possible, but likely.
Playing the platinum-palladium spread is a non-starter for most investors and traders. It is illiquid, volatile and has the potential do more harm than a straight-up long position in either market. We are highlighting this spread and the platinum-gold spread to illustrate what a relative bargain platinum is now.
Three Reasons Why Platinum Is a Bargain
- Trading at a historical discount to palladium, despite far better industrial properties and a huge cost advantage for catalytic converter and automobile manufacturers.
- Trading at a huge, historical discount to gold, despite being far rarer and having a long history of being worth more than gold.
- Ignored by investors due to weak relative performance, despite a history of outperforming both palladium and gold.
One can crunch all the supply and demand figures one wants, but when it comes to bull markets in metals nothing comes close to investor demand. When will investors get interested in platinum again? When the rally starting in gold spreads to silver and beyond. Platinum is so overextended to the downside vis-à-vis gold that any spark could ignite it, transforming platinum from the worst performer in metals to the best.
Platinum Is a Buy
Weekly platinum futures appear to be establishing a bottom. Friday’s close marked the second consecutive weekly close over the previous week’s high. This is a bullish signal. Our near-term upside targets are $885 per ounce and $950 per ounce. Our longer-term targets are $1,050 per ounce and $1,220 per ounce. Two or more Friday closes over old swing highs of $882 in the front futures contract could provide the spark we are looking for in this market.
RMB Group trading customers who can afford it, may want to consider buying platinum futures straight up – using them as a proxy for physical platinum which can be expensive to buy given typically high premiums and dealer mark-ups for bullion. Platinum’s contract size is 50 ounces. This makes each futures contract worth $41,280 at Friday’s close of $825.60 per ounce.
Buying the futures contract and posting $41,280 with your broker completely removes the leverage that gets so many folks in trouble. Consider buying the July contract and rolling into the January 2020 contract at the end of June. Roll the January 2020 contract into the July 2020 contract prior to the end of December, and so on, for as long as you want to hold the position. Your account will fluctuate $50 for each $1 move up or down.
You can also dial up your leverage. Instead of posting the full $41,280 contract value, you could post half or less and use the remainder to generate a return somewhere else. We do not expect platinum to dip substantially below current levels, but that doesn’t mean it won’t. Platinum dipped as low as $400 per ounce in 2002. Be ready to add more cash should platinum decline substantially.
Options Are a Viable Alternative
Platinum options are not heavily traded and can be tricky to buy and sell, but they do offer a viable alternative to the futures contract. The trick is to use limit orders and be patient. RMB trading customers may want to consider buying July $900 platinum calls, looking for platinum to “giddy up and go” between now and option expiration on June 19th. This option closed Friday for just over $500. Let’s see if we can pick one up for $600 or less.
Your maximum risk is the price paid for the option plus transaction costs. Our July call will be worth at least $2,500 should platinum hit our second near-term objective of $950 in the July futures contract and $7,500 if the market rallies to our $1,050 objective.
Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping its clientele trade futures and options since 1984 and are very familiar with all kinds of option strategies. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com.
* * * * * * * *
The RMB Group
222 South Riverside Plaza, Suite 1200, Chicago, IL 60606
This material has been prepared by a sales or trading employee or agent of R.J. O’Brien & Associates (“RJO”)/RMB Group and is, or is in the nature of, a solicitation. This material is not a research report prepared by a Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.
DISTRIBUTION IN SOME JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY LAW. PERSONS IN POSSESSION OF THIS COMMUNICATION INDIRECTLY SHOULD INFORM THEMSELVES ABOUT AND OBSERVE ANY SUCH PROHIBITION OR RESTRICTIONS. TO THE EXTENT THAT YOU HAVE RECEIVED THIS COMMUNICATION INDIRECTLY AND SOLICITATIONS ARE PROHIBITED IN YOUR JURISDICTION WITHOUT REGISTRATION, THE MARKET COMMENTARY IN THIS COMMUNICATION SHOULD NOT BE CONSIDERED A SOLICITATION.
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that RJO/RMB believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.