Platinum recently entered into its annual period of seasonal strength. What are the prospects this year?
According to EquityClock.com, platinum has a period of seasonal strength from Dec. 23 to Feb. 21. The trade has been profitable in 30 of the past 40 periods. Average return per period was 8.7 per cent. The commodity has outperformed the S&P 500 by an average of 6.5 per cent since 1973.
Seasonality in platinum is primarily influenced by demand in the auto and jewelry industries. The auto industry consumes about 37 per cent of the annual production and jewelry takes another 31 per cent. Platinum is also used in electronic products, anti-cancer drugs, turbine engines, and fuel cells. Incremental demand during the period of seasonal strength comes mainly from the auto industry. Platinum is an important component in catalytic converters that control exhaust emissions. The traditional auto buying season is from February to May.
The outlook for platinum in 2014 is encouraging. Demand for platinum used in the auto industry continues to grow thanks to improving world economies and the need for more pollution control. Demand for autos in 2014 is expected to reach a record with notable gains projected in China, India, and North America. Sales in the U.S are expected to reach 16 million units. China, as the largest auto producer in the world, once again is expected to exceed U.S. production.
A declining supply of platinum is also a factor. Johnson Matthey estimated in a recent report that demand exceeded supply by 605,000 ounces in 2013 when total demand reached an estimated 8.42-million ounces. Another deficit is predicted in 2014. Reliability of supply is expected to add to concerns. Approximately three-quarters of the world's platinum production comes from South Africa and Zimbabwe. Labour unrest in the industry during the past few years is continuing. In addition, availability of electricity needed for mining some of the deepest mines in the world has become an issue. Rising employment costs, an unreliable power source, and a 16 per cent drop in the price of platinum during the past year have prompted mining companies to curtail plans to increase production. Added to uncertainties was a threat in November by Zimbabwe's President Robert Mugabe to either halt exports of concentrate to South Africa or to introduce a 15-per-cent levy unless three of the country's platinum producers build a refinery costing $3-billion (U.S.) by 2015. The platinum producers claim that Zimbabwe doesn't produce the 100 megawatts of power the refinery would need.
On the charts, platinum has a mixed, but improving technical profile. Intermediate trend is neutral. However, platinum bottomed in mid-December at $1,311.70 (U.S.) and recently moved above its 20- and 50-day moving averages. Last week, platinum started to outperform equity benchmarks, including the S&P 500 index and S&P/TSX composite index, and its intermediate downtrend was broken. A move above $1,481.30 will establish an intermediate uptrend.
Investors can participate in the seasonal trade in platinum by owning exchange-traded funds. Top choice is ETFS Physical Platinum Shares (PPLT). Units trade at approximately 1/10th the price of platinum and are backed by physical metal. An alternate choice, that is also backed by the physical metal, is ETFS White Metals Basket Trust (WITE). The trust holds a basket of precious metals, weighted 55-per-cent silver, 33-per-cent platinum, and 12-per-cent palladium. Another alternative is iPath DJ-UBS Platinum units (PGM). Units are backed by platinum futures contracts.
Don and Jon Vialoux are the authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. They are also research analysts at Horizons Investment Management, offering research for the Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are their personal views, although they may be reflected in positions or transactions in the various funds managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://TimingTheMarket.ca/ and http://EquityClock.com.