Should you buy into a platinum ETF?

published 2 May 2007

Update: read Platinum: this year's best commodity? for more analysis on the outlook for platinum investing

Good news for precious metals investors platinum is now much easier to buy. ETF Securities launched a platinum exchange-traded fund (ETF) this week (PHPT), and Switzerland's ZCB follows suit next month. But not everyone is happy.

Both Anglo Platinum and Impala, the world's largest producers by volume, say they will not supply any platinum to the ETFs, which have to be backed by the physical metal. Anglo opposes the move because "it takes metal away from physical consumption and therefore would push the price up", spokesman Trevor Raymond tells Reuters.

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But why wouldn't producers welcome higher prices? "The producers are not supportive because it has the potential to damage jewellery demand through high prices and volatility," says Mark Smith of RBC Capital Markets. And if prices go high enough, it would also encourage industrial users to switch to cheaper alternatives and once that happens, it's very hard to go back.

Supply is already tight, having been outstripped by demand every year for the past eight years. Last year, for example, demand came in at 7.02 million ounces while supply was only 7.0 million. Stocks of platinum have fallen as demand for autocatalysts, a device in vehicles that helps clean exhaust fumes, has risen. Demand from this source rose to 4.38 million ounces last year, up almost 15% on 2005's figure.

Of course, a squeeze on prices is good news for investors and, despite miners' objections, both ZCB and ETF Securities have already secured the metal they need. If the response to a platinum ETF is as good as for gold ETFs, the price should rise. Investment demand for gold rose 10% in the final quarter of 2006, fuelled by gold ETFs, says Ian Henderson of JPM's Natural Resources Fund on IFAOnline.co.uk. The platinum ETF "would theoretically add about $40 per ounce in platinum prices for every 100,000 ounces bought", says Jon Nadler, analyst with Kitco Bullion Dealers.

That could also be good for palladium if industrial users switch from expensive platinum; palladium jewellery is taking off, and the metal can also be used as a platinum substitute in catalysts. John Reade of UBS reckons it could go to $420 in the next three months, from $380 today.

Conveniently enough, ETF Securities has also launched a palladium ETF (PHPD). But while it's early days, neither it nor the platinum ETF have met with huge interest so far - just 82 ounces of platinum changed hands on the first day's trading.

More popular, and perhaps the best bet for investors, is ETF's Precious Metals Basket (PHPM), which invests in both platinum and palladium, as well as gold and silver. By investing in this option, you can hedge your platinum bet with palladium exposure and buy into two of MoneyWeek's other favourite metals at the same time.