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Noble Musings

By Jon Nadler       Printer Friendly Version
Mar 6 2009 4:12PM

Good Afternoon,

Friday's markets offered a wide variety of assets moving in many different directions at once. A quick survey shows oil up (nearly two bucks - on what?), the dollar down (0.60 on the index at 88.47 after having dipped much lower), the Dow down (by 88 points at 6500 or so) copper, zinc, and lead down, silver up, platinum up, palladium up. Gold, up as well. Bullion could finish the week pretty much where it started. That is not to say it was a week bereft of excitement. The worst of it came from the labor front, where 651,000 jobs vaporized last month. Another hit, another slew of home mortgages in danger of being, another set of wheels that might not burn gas except to hunt for a $9/hr. job.

New York spot bullion was last seen at $939.00 per ounce (up $6.60) with very little additional interest shown by participants at this late hour. Anyone going out to the Mumbai bazaars this weekend will probably be able to pick up some gold at unheard of slim premia above content. And, maybe even under content, as much of the recently manufactured baubles originated in scrap metal being resold.

For a change, let us take a look at platinum. Despite dire news from the automotive world, the noble metal managed not only to climb back up above $1K but nearer to $1.1K of late. Is this move for real, or it is more of the same spec fund betting we've seen elsewhere in metals? Our good friend Rhona O'Connell, over at Mineweb tries to untangle the platinum knot and walks away with a predictable conclusion:

The two major platinum-holding exchange traded instruments are the London Exchange Traded Commodity run by ETF Securities Ltd and the Zurich-based Exchange Traded Fund run by Zurich Cantonal Bank. The London fund was launched in late April 2007 and the Zurich fund launched three weeks later in mid-May.  There was all sorts of market panic in the previous November and December when rumours of such funds were circulating; the soothsayers were proclaiming that there wouldn't be enough metal and that the market was insufficiently liquid.  Platinum lease rates rocketed. On Friday 24th November 2006, one-month platinum rates spiked to 86%, with three months running up to 66% and twelve month rates reached 25%.  A far cry from now, with one-month rates effectively at zero, three months at less than 60 basis points and twelve months at 1.3%.

There was no such panic when the two funds came into being. Between the start of April and end of Amy 2007, one month rates traded between 1.7% and 2.1%, with twelve months trading between 3.2% and 4.0%. 

Meanwhile the tonnages involved in the new funds, while not attracting the coverage of platinum's rather sexier (in some people's view) partner gold, have been impressive given the size of the market overall. Activity in the funds started gently, with the purchases of 1.93 tonnes in the five months to end of September, and then flattening out over October. Then the momentum really started to build, and between the end of October 2007 and mid-March 2008 the two funds between them acquired ten tonnes of platinum, rising to 12.0 tonnes before again flattening and building for the assault to the 15 tonne peak in early July. This is an impressive strike rate and needs to be put into context.

The platinum market is a small one, with global demand (excluding ETFs) in 2008 of 224 tonnes (figures from GFMS Ltd).  This very strong period of ETF investment, with purchase of ten tonnes between 29th October and 19th March would, on a very simple straight line extrapolation, work out at almost 25 tonnes over a full year, equivalent to almost six weeks' global demand.  Looked at another way it would have been half as much again as North American platinum demand for emission control catalysts in 2008.

Little wonder, then, that platinum registered its record high of $2,273/ounce in early March 2008. 

Equally the rate of disposal of metal from these funds in the second half of 2008 had a significant effect on platinum's fall in price.

During March there was a very slight fall-off in holdings.  April was more or less stable and then demand started to pick up again in May and June, taking the metal under management up to the high to date of 15.0 tonnes over the first week-end of July; then liquidation started and between Monday 7th July and Friday 21st November, the holdings in the funds halved to 7.5 tonnes.  On an annualised basis this equates to a return to the market of almost 19 tonnes - or more than the total North American emission control catalyst scrap return during the year.

There has been a very sharp intake of metal since November, almost as rapid as the original surge. Since then these funds have been replenishing their coffers and in early March the combined holdings have increased to 13.8 tonnes. This represents an annualised rate of increase of 23 tonnes, over 90% of the rate when the funds were gearing up in late 2007 and early 2008.  This begs the question as to why the platinum price is not responding in kind and of course the answer to that is that the market is deeply concerned about the impact on demand of the economic environment and, in particular, of course, the automotive sector.  Well, most of the market is.

Since the November low, the net flow of funds into these platinum funds works out at $199 million.  While this is small fry when compared with the gold funds (current content worth $45 billion against platinum funds at $463 million), almost $200 million have gone on the table recently in the belief that platinum is oversold and is discounting all the bad news.  If these investors are right then they have made a superb market call.  If not, then the market is again looking at an overhang."

Have a great weekend, everyone. Look for us on Bloomberg Radio at 6:10 am (???!!!!) on  Monday - 'live' - as 'live' as one can be at that hour....

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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