Investors Are Going Crazy For Platinum & Palladium

All of a sudden the precious metals markets have shifted focus away from gold and silver as we see volume and interest squarely on platinum and palladium. As most of know there is a growing demand for these metals in the production of catalytic converters in automobiles. Not long ago the Volkswagen scandal sent these metals tumbling as they are also used in the production of diesel engines.

In simple terms, a catalytic converter is an apparatus used in cars to decompose harmful exhaust gases from internal combustion engine to more environmentally friendly fractions. Platinum and palladium prices tends to be volatile thanks in part to a highly concentrated supply environment. Together Russia and South Africa control between 70% and 80% of the world’s supply of PGMs. The structure of supply has not altered in any substantial way since the 1970s when platinum and later palladium came to the fore as an important part of the world’s automobile industry.

Palladium finds application in gasoline engines and is more exposed to the Chinese and US markets, where diesel hardly features in the passenger vehicle segment. Roughly 75% of palladium demand is from the autocatalyst sector. Platinum loads are higher in diesel engines, but on a proportional basis the auto industry represent 50% of total demand with jewelry responsible for the bulk of the remainder.

While most industrial metals and minerals have enjoyed a good week and month, including unlikely candidates such as thermal coal and iron ore, precious metals is still where the action is.

After underperforming gold in 2016, platinum has now overtaken the yellow metal with a year to date advance of a shade under 34%. A chunk of those gains came just the last week with the spot price climbing 6%. The precious metal was up 12.7% in July and started August with a bang to exchange hand $1,162 an ounce in early afternoon trade on Monday, making it the best monthly performance since 2012.

Also in the metal family palladium has enjoyed its best month for nearly a decade, soaring 21.1% in July. Its performance for the month constitutes the bulk of its gains year to date and measured from its January 12 low the metal is up an astonishing 52% or $250 an ounce trading at $717.50 on Monday.  From trough to peak in 2016, palladium is now even besting silver, the best performing precious metal.

The main reasons for a platinum deficit include South African supply growth remaining constrained near term and slowing growth in autocatalyst recycling combined with robust autocatalyst demand from Western Europe.

For palladium, autocatalyst growth in Asia will be key, in Citi’s view, coupled with global demand for palladium in automobiles increasing nearly 3% to a record in 2016.

Supplies of platinum and palladium, key ingredients in autocatalysts, are forecast to be in deficit for full-year 2016, with the dollar platinum price averaging $985/oz. this year and $1,040/oz. in 2017, Citi said Monday.

Strategist at the bank David Wilson said platinum is likely to register a 172,000 oz. deficit with palladium short by 847,000 oz.

“We expect platinum to average $1,120 in 2018. For palladium, we expect $690 through 2016, 17, and 18 respectively,” he said.

Platinum is also seeing a rise in investment demand through coin sales. The U.S. Mint is reporting unprecedented demand for its limited one-ounce American Eagle Platinum bullion coins as its inventory has been almost completely depleted after releasing the coin only two days ago.

According to the mint’s daily sales data, 18,400 coins have been sold after being made available to authorized purchases July 26. This is the first time the mint has offered a platinum bullion coin since 2014 when it sold 16,900 one-ounce coins, which was the first time the coin was produced since 2008.

The new bullion coin comes as platinum prices have soared so far this month, up almost 11% since July first, outperforming gold, which has seen a gain of 0.7%; at the same time silver prices are up 7.4% so far this month. For the year platinum is up 27%, while gold has rallied more than 25%.

The main likely drivers for the continued rally in the platinum price — already up around 25% year to date — are investment demand, and increased supply tightness, according to HSBC.

Palladium is lagging, having rallied 7% so far this year. In a bid to boost global platinum demand, industry lobby group the World Platinum Investment Council said Thursday it endorsed Japan’s physical platinum exchange traded fund. The move is part of a wider series of strategic initiatives WPIC is developing throughout 2016.