The Definitive Guide To Platinum ETFs: Platinum ETF Investing 101
Precious metals ETFs have become a popular investment choice for investors looking to establish an inflation hedge or seeking a safe haven in times of economic uncertainty. While these assets are generally concentrated in a handful of gold and silver funds, a number of ETFs and ETNs offering exposure to platinum, one of the “forgotten precious metals” have seen a surge in popularity as well. While not as widely-used as gold and silver, platinum can serve a number of purposes in investor portfolios, offering potential for both diversification benefits and enhanced returns.
Platinum is a dense, malleable, corrosion-resistant metal used in a wide variety of consumer and industrial products, including jewelry, laboratory equipment, dentistry equipment, and electrodes. But the majority of platinum is used in catalytic converters for automobiles. Catalytic converters allow the complete combustion of low concentrations of unburned hydrocarbon from the exhaust into carbon dioxide and water vapor, and as such are critical to controlling emissions.
Scarcity Drives High Prices
Platinum is extremely rare, with estimated new mine production of only about 210 tonnes per year. This scarcity can make platinum significantly more expensive than both silver and gold. Recently, gold and silver were trading for about $1,000 and $16.50 per troy ounce, respectively, while platinum was trading for $1,280. Because it has many industrial uses, the price of platinum is significantly more volatile than gold. Over the last year, platinum has traded between $763 and $1,339 per troy ounce according to the London Platinum & Palladium Market.
During periods of economic strength and stability, platinum may trade at twice the price of gold. But in uncertain economic climates when industrial activity slows, gold may become more expensive than platinum. The largest known reserves of platinum are found in South Africa, with Russia and Canada also maintaining large metals deposits. South Africa accounts for approximately 80% of the world’s platinum supply.
Cars Are Key
Given their use in emissions control devices, platinum prices can be impacted significantly by both demand for new automobiles and the regulatory environment surrounding emissions. Over the last two years, the U.S. auto industry has fallen on hard times, with steep sales declines, massive workforce reductions, and even bankruptcies.
Despite the recent slowdown, there are reasons to be bullish on global demand for catalytic converters in automobiles. In the short term, government stimulus plans, particularly the “Cash for Clunkers” program, have driven consumers to replace old cars. And there are signs of more sustainable global demand for automobiles, as rising incomes in developing markets like China and India make car ownership attainable for an increasingly large portion of the population. Moreover, increasingly stringent legislation requiring manufacturers to cut carbon emissions increases the importance of precious metals like platinum.
Some industry experts believe that the U.S. auto industry has turned the corner, and platinum prices will surge over the next three years as the economic recovery progresses. “I really think that the worst of the price drop is over,” said Gregory Wing, CFO of Stillwater Mining Co. “A lot of what’s keeping the price up right now is investment interest in those metals.”
Many analysts believe that the limited supply of platinum makes this metal a preferred means of investing in precious metals. Mining and extraction of platinum is an extremely labor-intensive and complex process, yielding about six million ounces of platinum every year. This amount represents less than 5% of annual gold production. According to Northwest Territorial Mint, all of the platinum ever mined would fill a room measuring less than 25 feet on each side. Moreover, above ground supply of platinum could be expected to last about a year, compared to about 25 years for gold.
ETF Plays On Platinum
For investors looking to gain exposure to platinum prices, the two most efficient options are the iPath Dow Jones-UBS Platinum Subindex Total Return ETN (PGM) and the UBS E-TRACS CMCI Long Platinum Total Return ETN (PTM). Both of these products are designed to track the performance of a basket of platinum futures contracts [see fundamentals of PTM here].
|Ticker||ETN||Index||Expense Ratio||Avg. Daily Volume|
|PGM||iPath Dow Jones-UBS Platinum Trust Subindex TR ETN||Dow Jones-UBS Platinum Subindex Total Return||0.75%||41,000|
|PTM||E-TRACS UBS Long Platinum ETN||UBS Bloomberg CMCI Platinum Total Return||0.65%||77,000|
It is noted that both of these products are structured as ETNs, meaning that they don’t physically hold platinum, but rather promise to pay investors a return equivalent to changes in platinum prices. However, London-based ETF Securities offers a physically-backed platinum fund in Europe, and has filed for approval on a similar ETF here in the U.S. This fund could hit the U.S. market as soon as the fourth quarter of 2009.
UBS also offers the E-TRACS CMCI Short Platinum Excess Return ETN (PTD), a product that tracks the inverse return on a basket of platinum futures contracts plus a fixed income return on a Treasury Bill Portfolio (see charts of PTD here).
For more reading on platinum investing, see:
Disclosure: No positions at time of writing.