Platinum: ETF demand points to a price increase

Our optimism stems from the April launch of a new platinum ETF by South Africa-based Absa Capital. Absa’s new ETF, which is the first of its kind in South Africa, managed to acquire 368,000 oz of platinum in its first month alone. Chart A, courtesy of Bloomberg, shows total platinum ETF holdings since mid-2011. The spike on the right-hand side is entirely due to Absa Capital’s recent purchases, which represent an increase of roughly 25% in total platinum ETF holdings since early May. This also moves the total platinum ETF holdings to a record high, for a total holdings increase of 35% so far this year. No other precious metal ETF has seen this level of inflow over the same period.

It is particularly interesting that the majority of Absa’s ETF inflows are from South African institutional investors who are privy to the current state of platinum mining within the country. Conversations we have had (supported by Absa’s recent success) suggest that money managers in South Africa are transferring out of platinum mining equities and building their exposure through the metal itself. Could it be that they know something we don’t?

Chart A

Source: Bloomberg, Sprott Asset Management

Certainly the fundamentals that attracted us to platinum as an investment are still very firmly in place. The supply situation out of South Africa has continued to deteriorate markedly, with the most recent news centering on the tense wage negotiations currently taking place between dueling unions and the mining companies. Following further shootings that took place last week at Lonmin’s Marikana platinum mine, the South African government admitted that it may deploy a peacekeeping force to the rest of the country’s mines in the coming weeks to ensure order.

Tensions have also been heightened by the growing conflict between the country’s two opposing union groups, the government-supported National Union of Mineworkers (NUM) and the Association of Mineworkers and Construction Union (AMCU), a militant upstart that has attracted thousands of former NUM supporters. The NUM and AMCU are in a constant struggle for dominance, and have complicated the negotiation process by lobbying against each other for majority recognition in mining labour talks.
Platinum’s demand side has also shown signs of strength in the first half of 2013, especially through increasing investment.

According to Johnson Matthey, aggregate investment demand for platinum totaled 460,000 ounces in 2011 and 455,000 ounces in 2012. Meanwhile, year-to-date investment demand has already surpassed 570,000 ounces – representing an increase of 25% over last year’s total despite the year only being half way through. If European car sales can stabilize (there were signs of hope in April’s numbers), and South Africa’s mining issues continue to worsen, we could very well see a significantly higher total investment number by the end of the year as more investors shun the miners and seek to capture platinum’s upside potential by buying the metal itself.

Given the factors discussed above, we believe platinum has a strong chance of re-testing its upper trading range of around $1,730/oz in the coming months. If the rest of the precious metals complex can also exhibit some strength, we would not be surprised to see platinum break through $1,730 entirely.

Chart B

Source: Bloomberg, Sprott Asset Management

By Dave Franklin and David Baker for Sprott Group