Vogelzang: PPLT A Nice Fit

November 15, 2013

Whether platinum is beauty or beast, owning PPLT is a solid way to get precious metals exposure, Vogelzang says.

This article is part of a regular series of thought-leadership pieces from some of the more-influential ETF strategists in the money management industry. Today’s article features Michael Vogelzang, president and chief investment officer of Boston-based Boston Advisors, LLC.

Platinum, the “other” gold, has outperformed its precious metal brethren over the last six months, as investors have come to recognize some of its unique characteristics. At Boston Advisors, we look at each investment with three lenses—fundamental, sentiment and price—seeing both the investment opportunity and challenge from different angles.

In this article, we apply those lenses to platinum and discuss its role in a portfolio, focusing ultimately on the sensibleness of owning the ETFS Physical Platinum Shares ETF (PPLT | A-100), the exchange-traded fund market’s only physical platinum ETF.

Precious Metals Performance: 6 Months Ending 10/31/13

Precious Metals

Source: Bloomberg

Fundamental Lens

We begin by identifying the fundamental case for platinum—supply and demand, valuation, thematic underpinnings, among other basics. Fundamentally, platinum has a beauty-and-the-beast profile. The beauty is, of course, its precious metal qualities.

  • Recently, demand for platinum jewelry has been steadily rising in many countries around the globe. China represents a good portion of that demand.
  • Platinum, along with palladium, is used extensively in auto-emission technology. As a result, demand for platinum has been rising with the post-crash recovery of the global automobile market. As the long-term story for better emission control around the globe continues to improve, particularly in the larger emerging markets countries, we expect industrial demand to remain strong.

Platinum Demand

0_PlatinumDemand

The beast surfaces in platinum’s supply story.

  • Approximately 70 percent of platinum is mined within the platinum belt of South Africa. Labor relations have been fractious for years, and could worsen in the near term. Wage demands, intimidation and violence have strained relations, and more of the same is expected, as the major companies battle unions for control over the profitability of platinum mining. While supplies have not yet been significantly crimped, and companies have stashed larger-than-normal stockpiles in case of a full work stoppage, the potential for longer-term shortages does exist. This could potentially put upward pressure on prices.

 

Sentiment Lens

Next, we calculate investor sentiment. We firmly believe that sentiment is negatively correlated with future price movement. For instance, if sentiment is high—that is, an idea is popular among investors—the price will likely struggle. We believe the opposite, as well: If investors are down on an asset, we think it’s likely an attractive time to buy.

Given the poor performance of precious metals in general, the overall sentiment for gold, silver and platinum is nearing historic lows. While the industrial precious metals have fared better than gold in terms of price, investors have been moving away in anticipation of tighter central bank policies around the world. Term structure of the futures curve and put/call ratios show sentiment around platinum at critically negative levels, potentially setting the stage for price improvement.

Price Lens

Lastly, we seek justification in price. This could take the shape of momentum with relative strength or the reverse—a mean reversion of the price after a significant move in either direction.

Platinum prices have performed well on a relative basis to the other metals, only falling 5.84 percent year-to-date through Oct. 31. This is in contrast to gold (down 21.03 percent) and silver (down 27.78 percent) for the same period. While gold and silver are correcting a 13-year bull-run, platinum has shown more staying power, even with sentiment staying quite negative. The relative strength in a bear market is a great sign for better performance once the market turns up for precious metals generally.

Beauty Or Beast?

Platinum has favorable fundamental, sentiment and price aspects to its profile at present. While not quite a fat pitch, we believe this is an investment with potential. While our three lenses help us identify the investment opportunity, we also look carefully at the metal’s risk profile:

  • Economic Risk: If global economies reverse direction and growth slows, taking auto sales down with it, platinum prices would likely come under pressure.
  • Supply Risk: It’s likely that the current price of platinum has at least a 5-10 percent premium priced in for the current labor strife. Should peace prevail and production ramp up significantly, platinum prices would likely weaken.
  • Sector Risk: As part of the global precious metals complex, platinum should perform in line with expectations for precious metals. This includes acting as a hedge against wayward central bank policies. Should these polices become tighter and more focused on long-term currency protection around the world, metals prices would likely fall, including platinum.

Role In A Portfolio

The most common question we get about platinum is, Why would you add it to a portfolio that already has the ubiquitous gold holding? This is a very fair question, given that gold and platinum share a reasonably high correlation of between 70-75 percent. Nonetheless, we believe platinum’s unique qualities position it well to play a few roles in a well-diversified portfolio:

  • Offensive Role: We consider platinum a satellite position within our metals allocation. This position helps us achieve our target commodities exposure, while also helping us participate in the growth opportunity we see for this metal.
  • Defensive Role: Because platinum demand is fed by two sources—jewelry and the auto industry—we see holding platinum as a way to diversify our commodity allocation. This has played out well for us in the past six months (4/30/13-10/31/13), as the precious metals sector came under pressure. Gold fell 10.40 percent, while platinum fell 3.80%. (For the curious, silver fell 9.94 percent.)

Selecting A Vehicle

The only significant vehicle for platinum investment in an ETF vehicle is PPLT. This ETF holds physical platinum and is designed to track the underlying price of the metal. With good liquidity and almost $1 billion in assets, we feel the fund trades well. For a price of 60 basis points, or $60 for each $10,000 invested, exposure to physical platinum is a smart choice for long-term and short-term commodity and precious metal exposure.


Michael J. Vogelzang, CFA, is president and chief investment officer of Boston Advisors LLC, a boutique investment company headquartered in Boston. To learn more about Boston Advisors and the firm’s investment capabilities, please visit www.bostonadvisors.com or contact Chief Marketing Officer Peter Anderson at (617) 348-3127 or [email protected].


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