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An opportunity in platinum [ClearOnMoney]
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Investment

An opportunity in platinum

15 Apr 2013 by Jim Fickett.

Last December I posted a rather lengthy analysis of the platinum market, and came to the conclusion that the price then, in the neighborhood of $1600, was probably on the low side, given that mining costs have increased significantly in recent years (Platinum mining costs are likely to drive the long-term price moderately higher).

Over the last three years platinum has traded in the range from about $1400 to about $1800. So the $1600 price last December was about in the middle of the range. I made up my mind at that time that if platinum went back down to the bottom of the range, I would buy. Today the price went to $1395.

With the price staying mostly below the long-term cost of production lately, one would expect mine closures. This is, in fact, exactly what is happening. From Bloomberg in February:

Platinum supplies are falling to a 13-year low as mines in South Africa, the world’s biggest producer, close and automobile sales reach new highs.

Production will drop 2.7 percent to 5.68 million ounces, the least since 2000, according to Barclays Plc, which raised its 2013 shortage estimate sixfold last month after Johannesburg-based Anglo American Platinum Ltd. (AMS) said it plans to idle shafts. At the same time, demand from carmakers, the biggest consumer of the metal, will increase 0.5 percent in 2013, Barclays says. …

Global production of the metal will fall as South African output drops 3.4 percent to a 12-year low of 4.11 million ounces, Barclays estimates. There was a 394,000-ounce shortage last year as Impala Platinum Holdings Ltd. (IMP) shut its Rustenburg mine, the world’s biggest, and police killed workers striking over pay at Lonmin Plc (LMI)’s Marikana complex.

South African producers closed nine platinum-mine shafts and dismissed 3,332 workers in the second half of 2012, the Department of Mineral Resources says. Amplats, as the top producer is known, said Jan. 15 it would idle four shafts and cut 400,000 ounces of platinum output a year, about 7 percent of global production, to restore profitability.

I don't think one should take any precise predictions of shortages too seriously – no one can predict the course of the recession in Europe or growth in China. The main point I want to make by quoting this analysis is that, as expected, mining companies cannot make money at the current price. Therefore, in the long run, the price is very likely to rise.

If the opening price on Tuesday is still in the neighborhood of $1400, I will put another 2% of the portfolio in platinum. Since commodities are, in my overall strategy, in part protection against possible high inflation, I will make the purchase within an IRA (so as not to be taxed on illusory nominal gains), using the ETF ETFS Physical Platinum Shares, with symbol PPLT. Shares in this ETF are backed by 600 thousand ounces of physical platinum stored in vaults.

Writing about this ETF, Zacks Equity Research said in March,

heading into 2013, the outlook for platinum prices appears much better. The reason is that the metal is going through a supply deficit attributable to the labor dispute in South Africa and other factors in this important producing nation which makes running many mines unprofitable …

investors looking to capitalize on the outperformance of the metal can consider investing in Zacks top ranked ETFS Physical Platinum Shares ETF (PPLT). …

PPLT is the only ETF which is backed by the physical metal and holds the metal in the form of bullion or ingots. The metal is securely stored in London and Zürich on behalf of the custodian, JP Morgan Chase Bank.

Investing in platinum through PPLT represents a cost-effective and suitable mode for investors. It is expected that the transaction costs for buying and selling the shares will be lower than purchasing, storing and insuring physical platinum for most investors …

PPLT is by far the most liquid option available in the platinum ETF investing world, trading with volumes of 75,100 a day. The fund trades with assets under management of $842.6 million.

The expense ratio of 0.60 basis points also appears to be much lower than other ETFs in the space despite the relatively greater costs associated with physically storing the metal.