Solid Auto Sales Boost Platinum, Palladium ETFs

by on March 3, 2010 | ETFs Mentioned:

After weathering a severe and prolonged downturn that saw multiple bankruptcies, unprecedented government intervention, and the near demise of the entire industry, American automakers finally have some good news to report. Ford sold more cars than rival General Motors for the first time in 50 years in February (excluding two months in 1998 when GM was crippled by strikes), as car and light truck sales jumped more than 40% from the same period in 2009. Despite losing the monthly sales crown, GM reported a still impressive 11.5% bump over the previous year, while Toyota’s sales slumped following concerns over quality.

Car-shopping Web site recently reported that per-vehicle sales incentives in the U.S. fell 14% in February from a year earlier, indicating that the recent bounce in sales came without the aid of deep discounts that eat into profit margins. Ford is forecasting a pretax operating profit in 2010 after years of steep losses that saw market share and work force shrink. Ford’s stock price has gained more than 25% this year, including an 8% climb this week, rewarding investors who stuck with the beleaguered automaker. There is still no ETF focusing on the automotive industry (a glaring absence we can’t quite figure out), but several funds have received a nice boost from the auto industry’s improved outlook. Most notably, the Physical Palladium Shares (PALL) and Physical Platinum Shares (PPLT) from ETF Securities have been on the move this week.

The metals owned by these funds are critical components of catalytic converters for automobiles, so any sign of strong demand for vehicles generally results in an uptick in prices. Recently, PALL was up more than 3.5% on the week, while PPLT had added nearly 3%. “As long as investors feel relatively comfortable with auto sales, platinum and palladium will do very well,” said Nicholas Brooks, head of research and investment strategy at ETF Securities.

Platinum and palladium are among the rarest metals on earth–average annual production is just 7 million ounces and 8 million ounces, respectively–and the primary use for both is in catalytic converters for automobiles. The downturn in car sales and rise in use and efficiency of recycling techniques has caused prices to slump in recent years as demand outweighed supply, but a long-awaited rebound in the auto industry could reverse this trend.

Flying Out Of The Gates

Since their launch in the first week of the year as the first physically-backed palladium and platinum ETFs available to U.S. investors, PALL and PPLT have been tremendously popular. February numbers from the National Stock Exchange show that PPLT has about $437 million in assets, while PALL has just over $200 million. In an industry where new products often take years to gain traction with investors and climb above $10 million in assets, the success of the platinum and palladium ETFs is impressive.

Disclosure: No positions at time of writing.