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As Investors Increasingly Shun Platinum, Will Sentiment Eventually Improve?

The past few months have proved an increasingly challenging time for precious metals. The sector has failed to capitalise on growing trade tensions between the US and China and equity markets’ volatility. While some safe haven interest has emerged, this has largely favoured the US currency, rather than precious metals, which, if anything, have suffered from a stronger dollar, notes Metals Focus, the independent precious metals consultancy,

“While Investor sentiment has turned bearish towards most precious metals, however, platinum appears to have been the biggest casualty, reflected in the trend in net managed money CME futures positions. These have been negative (implying an overall net short position) since April and recently broke through a series of all-time lows.

This is not the first time platinum net positioning has turned negative. Last year, for instance, net shorts were seen from late April through to early August, briefly in September and October and, finally, from late December through to early January this year. However, the extent of the latest slump in platinum speculative interest has been deeper and longer lasting than the aforementioned periods. This negative speculative investor sentiment towards the metal is in, our view, the main driver behind platinum’s record discount to gold, which briefly fell to $437 on 3rd July.

The increasingly negative tone towards platinum reflects several issues. As discussed in Platinum & Palladium Focus 2018, the metal still faces unsupportive supply and demand conditions. In terms of the former, even though South Africa faces growing margin pressure we do not expect to see a meaningful cut in production this year. From a cost standpoint, input prices continue to rise, led by an increase in electricity tariffs. Although dollar strength has weighed on emerging market currencies, including the rand, partly offsetting weak dollar platinum prices, rand prices still remain depressed, and are currently at an eight-year low. Many investors are disappointed by the lack of apparent production discipline. At the other end of the spectrum, however, the South African industry would need to contend with political headwinds, should it look to implement a significant drop in headcount, not least with headline unemployment in the country of around 27%.

Switching to platinum demand and focussing on the automotive sector, the main issue remains the ongoing and steep market share losses for light duty diesel in Europe. This is by far the largest market for platinum automotive demand, accounting for around half of global offtake (estimated at 3.3Moz for 2018). To put the downturn for diesel into perspective, according to LMC Automotive, new diesel car sales this June accounted for less than 37% of western European sales. Just twelve months ago, the figure exceeded 45%.

The combination of lacklustre demand along with sticky global supply means that platinum must contend with market surpluses. In isolation, these are not significant. 2017’s total oversupply of 117koz is forecast to be followed by an estimated surplus of just 89koz this year. However, this means that above-ground stocks of platinum, which have already risen notably this decade (from 7.1Moz at end-2010 to an estimated 8.5Moz by end-2017), will grow further. Furthermore, we see little chance for sizeable deficits to develop in the near future, a necessary condition to meaningfully reduce these stocks.

As such, the ability for the platinum price to strengthen will remain largely contingent on the trend in gold. As mentioned above, the dollar is benefiting from safe haven buying as well as still diverging interest rate policies in the US and Europe. US growth also remains upbeat which is encouraging investors to retain their equities exposure. However, later this year as US growth starts to slow, the realisation should grow that the upside for equities is limited. In addition, concerns about growing US debt may well resurface as could a focus on the ECB’s forthcoming policy tightening. As a result, some rotation in favour of gold should gradually emerge, driving prices higher late in 2018, with a peak in the upper $1,300s possible in our view. This move should also benefit platinum. As a result, the platinum price may well end the year closer to $1,000 than $800.”

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