Private investment in platinum rockets during 2008, a watershed year for the metal - GFMS
A huge increase in "investment activity" in platinum in 2008 helped counter the big downturn in demand, but was insufficient to avoid an overall production surplus.
Author: Rhona O'Connell
Posted: Thursday , 23 Apr 2009
LONDON -
mineweb.com
The latest Platinum and Palladium annual Survey from GFMS Ltd records that despite further losses in mine production, especially from South Africa, platinum registered a gross surplus last year of 265,000 ounces, which ETF investment on its own was not strong enough fully to absorb. When the ETF activity is taken into account, the metal was in a smaller residual surplus of 162,000 ounces. Private investment (small bars, coins), however, was very strong and furthermore the figures from the Exchanges suggest that implied OTC investment was also extremely powerful. Investment flows overall substantially extended the fundamentally-driven volatility in the price over the course of the year.
Worries over the position in South Africa drove heavy investment in the ETFs in their first full year of operation (May 2007 to May 2008), but weakening auto sales, fears of a recession that drove widespread liquidation across a number of asset classes, plus worries over a troubled banking system generated heavy selling of the London fund in the latter part of the year and took platinum to a five-year low of $756 in October.
One of the more interesting features of the supply-demand balance tables in the survey is the line "retail investment", which stands separately from ETF activity and is taken above the line - i.e. the 265,000 ounce surplus referred to above is derived after accounting for this investment activity. This retail investment refers largely to very strong physical investment in Japan in the fourth quarter, stemming from the plunge in the dollar price that was extended in local terms by the strength of the yen, and the "unusual proximity of platinum prices to gold". Platinum did in fact move to a discount to gold in mid-December, fixing on three occasions at prices below gold, notably on 12th December when platinum was fixed in the afternoon at $801.00 and gold at $826.50. The average premium for the year as a whole was $701.00 and in mid-April a premium of more than $300 had been re-established.
The strengthening of the yen is illustrated by the fact that platinum's fall from high to low in dollar terms was as follows: from $2,273.00 on 4th March to $763.00 on 27th October, a drop of 66%. In yen terms the high was ¥7,550 per gramme and the low ¥2,276 per gramme, registered on the same days and the percentage fall was 70%. By year-end the dollar price had recovered by 18% and the yen price by 15%.
"Investment activity" in 2008 soared to a net demand of 452,000 ounces last year, after an average from 1999 - 2007 of just over 24,000 ounces per annum and small net disinvestment in both 2006 and 2007.
The vast majority of "investment activity" in physical platinum (and palladium) has historically been concentrated in Japan and the US. There was a healthy rise in purchases of both platinum and palladium products in Europe in 2008, although these are impeded to a degree by the fact that VAT is levied on sales of bars and coins and investment in this region therefore tends to be concentrated in the form of VAT-exempt metal accounts. In Japan, which has a long history of PGM investment and which has long been the most important physical investment market for platinum, there was a dramatic spike in demand last year. In 2006 and 2007 the country had driven the net disinvestment in the market, but last year demand rose to levels not seen in a decade. This was driven by extremely strong purchases in the second half in response to the sharp fall in price. Investment demand in the US was also much stronger last year, with primary sales of the platinum Eagle bullion coin jumping by 271% to 33,600 ounces, a level not seen since 2001. This was augmented in the second half of the year by a surge in interest in bullion bars, especially the one-ounce denominations.
[Breaking down the US Mint figures shows minimal interest in the first half of the year, with just 2,200 ounces of platinum sold in Eagle coins, while the second half ballooned; September sales were 12,400 ounces and October saw uptake of 17,000 ounces before November and December dwindled when the Mint had to suspend sales due to a lack of blanks. They have yet to resume in 2009].
Once ETF activity is taken into account the residual surplus in the market was 162,000 ounces and GFMS notes that the end-year data on proprietary net positions and non-commercial plus non-reportable positions make it clear that the balancing "implied net investment" did not take place respectively on either NYMEX or TOCOM. These figures actually show a combined net disinvestment on the exchanges of some 822,000 ounces over the year, and although GFMS cautions against too literal an interpretation of the Exchange numbers, they do suggest that the level of investment in the OTC market over the year would therefore have been far greater than the 162,000 ounces derived as a residual surplus. There is obviously also the possibility that some industrial inventory levels increased.
Investor and speculative influence increased markedly in both platinum and palladium last year, responding to tightening fundamentals, primarily due in the first half-year to supply concerns over the South African power crisis, and compounded by a spill-over from the gold market along with increasing investor interest in the commodities sector as an asset class. In the second half of the year there was a distinct shift in investor sentiment as fears waned over production disruption, exacerbated by the crumbling outlook for demand, notably in the emission control catalyst sector, but also cloaked in the retreat from the commodities sector as a whole.
The study notes that the OTC market experienced large swings in positions over the course of the year but argues that it is feasible that by year-end, net purchases would have prevailed. Much of the sell side activity during the price plunge was, according to anecdotal evidence, due to investors trading between themselves rather than all the metal moving into fabricators' hands; furthermore it looks as if bargain hunters and some safe-haven investors were active buyers during the fourth quarter, in parallel with private investors as described above.
This latter attitude developed in response to higher gold prices, a weaker dollar, incipient inflation threats, but probably revolved also around the longer-term view with particular respect to the longer term outlook and the potential rebound in demand that should be generated by a recovery in economic growth. Activity in the markets so far this year, with ETF holdings now at a record, suggest that this faith remains well-founded. |
