Platinum Update

Precious metals had a bit of a difficult week. Platinum lost ground with a range from $1241 down to $1195. Palladium had a range of $805 to $754 and Gold varied $1170 to $1142. Slowing global economic growth, the threat of disinflation, slowing auto sales and the end of quantitative easing in this country has taken its toll on the precious stuff. Not to mention the strength of the dollar versus other key currencies has added further downward pressure to metals across the board.

That said, we have taken the contrarian view and consider the sector, and especially Platinum worthy of consideration as a longer-term investment. Several weeks ago we highlighted the virtues of Pt. We wrote,“Given the tale of doom surrounding platinum, as a contrarian investor one needs to consider the prospect of an investment in the metal. For one, demand for the metal (especially in the automotive arena) exceeds global supply.

Figure one shows total global supply and total global net demand for platinum. These figures are provided by Johnson Matthey as shows a global deficit for the metal in 2012 and 2013. Barclays estimates that there will continue to be a global deficit for 2014 and 2015 to the tune of 1.8 million and 433,000 ounces, respectively. The large deficit for 2014 was largely related to the South African mining strikes that took an estimated 1 million ounces off the market.”

Looking at figure two, the supply / demand scenario should work well for the price of platinum over the long haul.

The fundamental support from favorable supply-demand dynamics is what is intriguing to us but we are watching Pt prices closely and are building long-term positions. As we continually monitor the price of Pt, one item jumped out. When looking at the daily price chart for Pt, it is possible that we are seeing a major bullish divergence between the price of the metal and its Moving Average Convergence Divergence (MACD) profile.

Several weeks ago Pt suffered a major bout of selling pressure but soon after rebound to more reasonable levels. Recently the metal has relinquished to the bears and have resumed its downward trend. Friday’s action saw a bit of strength. If this should turn out to be another bounce at these levels then the run could be quite aggressive. Notice how the price of the metal is making a lower-low while the MACD is registering a higher-low. This technical pattern paves the way for a near-term rally for Platinum. Should this be the case it would confirm that selling pressure is abating.

We are not suggesting near-term trading around the idea. We are longer-term holders but this information is useful for those of us that run a hedge book (we do) and attempt to mitigate near-term price fluctuations as we deal in the physical metal on a daily basis.

Joseph S. Kalinowski, CFA