Is The Time Right For A Platinum ETF?

by on August 27, 2009 | Updated November 9, 2009 | ETFs Mentioned:

Platinum is one of the world’s most precious metals, and for good reason. This beautiful, gray-white metal is highly sought after for use in jewelry, and is also very important for many industrial processes, particularly in the transportation industry.  While the multiple uses of platinum create a relatively solid price floor for the metal, platinum prices can be very volatile, depending on numerous macroeconomic and industry-specific factors. The recent turmoil in the auto industry and the government’s attempts to resuscitate the struggling sector have created an several interesting investment opportunities, be it long with PGM or PTM, or short with PTD.

Critical to Transportation

Platinum ETNs Offer An Intriguing Investment OptionPlatinum is a key component of transportation, both present and future. The metal is a critical component of catalytic converters, which are found in virtually every car that has been built in the U.S. since the converter’s invention in the mid 70′s.  The platinum in these converters acts as a catalyst that traps harmful gasses and by-products of burning gasoline. The converter then turns it into more environmentally friendly emissions which reduce the car’s negative impact on its surroundings. Also, platinum is crucial to most fuel cells that are in development today, especially proton exchange membrane fuel cells. This makes it poised to play a vital role in in the transportation industry of the 21st century, either as a component of the internal combustion engine or part of a newer fuel cell technology.

A Rare Store of Value

Platinum is one of the rarest minerals on the face of the Earth; it is estimated that all of the world’s platinum that has ever been mined could fit into a cube less than 25 feet on each side. Platinum is one of only four metals that is given a currency code as well (gold, silver, and palladium being the other three) and many countries including the United States, Canada, Russia and South Africa mint platinum coins. Due to this, platinum is often considered a great store of value and has seen a resurgence as of late as a new way to play the precious metals coin market besides gold and silver. Platinum offers investors an even rarer addition to their precious metals portfolio and a great way to diversify their holdings as well.

Recycling and Alternatives

Quite possibly the biggest drag on the price of platinum over the next few years could be the numerous recycling programs that span the globe and threaten to reintroduce tons of platinum back into the system. America’s wildly popular “Cash For Clunkers” program, which recently ended after exhausting the allocated funds, could keep a ceiling on platinum prices as recyclers take platinum out of gas guzzlers. Participants in this program are likely to replace their “clunker” with a smaller car that needs less platinum, thereby creating a net gain of platinum supplies in the market.

In addition, there has been a push to develop a way to use cheaper metals, such as palladium, in fuel cells, allowing companies to circumvent platinum entirely. But this is proving to be very difficult, and besides a recent Japanese breakthrough, little progress has been made towards replicating the unique properties of platinum. ETFdb Pro members can learn more in our Precious Metals ETFdb Category Report (if you’re not a Pro member yet, sign up for a free trial or read more here).

Due to the incredibly small size of the platinum market, (roughly 1.5% the number of ounces in the silver market) it is virtually impossible to create physically-backed ETF (i.e., a GLD or SLV type ETF) for platinum without distorting the market. For this reason, all of the platinum funds on the market today are exchange traded notes, or ETNs, which are essentially debt issued by a company that is guaranteed to pay a return based on the performance of an underlying index (in this case one linked to platinum prices).

ETNs are similar to ETFs in many ways, offering relatively low cost structures and intra-day trading opportunities. But there are some key differences as well. Since ETNs are debt issues that don’t physically hold any assets, the credit quality of the issuer is important. In the case of platinum ETNs, Barclays (who issues PGM) has a solid AA- rating from Standard & Poors while UBS, the issuer of PTM and PTD, has an equally strong rating. However, as many have learned the hard way, such ratings are not necessarily the most reliable, and investors should proceed with caution if investing in a platinum ETN.

The iPath Dow Jones AIG Platinum Trust Sub-Index ETN (PGM) has gained more than 25% in 2009:


Eric Durtam contributed to this article.

Disclosure: No positions at time of writing.