Platinum, Palladium ETF Could Quickly Hit Limit

January 11, 2010

 

The platinum and palladium exchange-traded funds launched last week by ETF Securities may soon hit position limits.

The ETFS Platinum Trust (NYSEArca: PPLT) and ETFS Palladium Trust (NYSEArca: PALL) are the first physically backed platinum and palladium ETFs in the U.S. Structured similarly to the SPDR Gold Trust (NYSEArca: GLD), the new ETFs hold physical bullion as their sole asset.

Although the funds only launched on Friday, they have already seen significant interest. More than 414,000 shares of PPLT and almost 295,000 shares of PALL exchanged hands, and assets under management for the funds are expected to rise quickly.

High investor interest in platinum and palladium is a double-edged sword, as these ETFs face stiff share limits governing how large they can grow. According to the funds’ prospectuses, PPLT is limited to holding 478,000 ounces of platinum, which, at Friday's prices, translates into approximately $751 million in assets.

PALL can hold up to 1.29 million ounces, a much higher proportion of that metal's total market; at Friday's prices, the cap is equal to $548 million in assets.

While the funds aren’t there yet, they could easily and quickly reach those limits if investor interest persists. By comparison, GLD has more than $40 billion in assets, and the largest silver bullion ETF (NYSEArca: SLV) holds more than $5 billion of that metal.

Heading Off Shortage?

ETF Securities put the caps in place to contain concerns that the two ETFs could create a shortage in the physical metals, which are widely used in a variety of industrial applications. Those concerns exist because the markets for platinum and palladium are much smaller than those of other precious metals, such as gold.

As of November 2009, total gold supply worldwide was 833 tonnes, or 26.8 million ounces, according to the World Gold Council. Total platinum supply for 2009, on the other hand, only was 6.055 million ounces, according to Johnson Matthey. Total demand reached 5.915 million ounces, meaning only 140,000 ounces of the metal were available last year as surplus. Likewise, total palladium supply for 2009 reached 7.175 million ounces, while total demand hit 6.520 million ounces, leaving only 655,000 ounces of palladium as spare supply.

Should the ETFs approach or meet these limits, it is yet uncertain what might occur. At the very least, the funds would likely trade at substantial premiums to their NAVs, forcing new investors back to alternative platinum group metals exchange-traded products, including the E-TRACS UBS Bloomberg Long Platinum ETN (NYSEArca: PTM) and iPath DJ-UBS Platinum TR Sub-Index ETN (NYSEArca: PGM). (Aside from PALL, no palladium ETF or ETN exists.)

But the alternatives have their own issues. Last October, PGM, the most popular existing fund, had to suspend creations; the futures-based fund butted against NYMEX's tight accountability limits for the metal.

ETF Securities could ask the SEC to remove the position limits from the funds, but it’s unclear if or how fast they would do so.

An interesting footnote: Although platinum and palladium are heavily used in the automotive sector—as much as 60 percent of yearly platinum demand is for catalytic converters—car makers mostly greeted the funds' Friday launch with silence.

That’s in far contrast to what happened a few years ago, when rumors that iShares would launch a platinum ETF created a major brouhaha among industry participants. That silence was likely directly tied to the position caps in the prospectus; if and when ETF Securities asks for more shares, industrial users may pay more attention.

 

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