PLTM Weekly: We Play Defense (NYSEARCA:PLTM)

Welcome to Orchid’s Platinum Weekly report, in which we discuss platinum prices through the lenses of the GraniteShares Platinum Trust (NYSEARCA:PLTM).

Thesis

PLTM has bottomed out at our 1-month low target of $8.15/share at the end of September, in part caused by a renewed sell-off in the dollar (DXY).

Source: Bloomberg, Orchid Research

That said, platinum remains below its month-ago level, like its complex with the exception of palladium.

Source: Bloomberg, Orchid Research

In the short term, we remain cautious because we do not believe that a bottom has been reached. While we think that the dollar should trade at a lower level over the next 12 months, there is a risk that the process of the US elections is chaotic, triggering some de-risking and a resulting appreciation in the dollar. In such a scenario, it is unclear whether platinum would sell off (platinum as a risk asset) or would shine (platinum as a precious metal, enjoying some haven flows).

Another factor underpinning our cautious stance is the fact that PLTM declined in September (-5%) despite healthy investment demand. The increase in investment demand appears insufficient to offset the weakness in platinum’s fundamentals (ex-investment).

Finally, it is worth noting that the seasonality of platinum prices is unfriendly in Q4, which could therefore play against PLTM in the next three months.

Against this, we expect PLTM to trade between $7.70/share and $10.00/share over the next three months.

Source: Bloomberg, Orchid Research

About PLTM

PLTM, which was created in January 2018, is directly impacted by the fluctuations of platinum spot prices because the Fund physically holds platinum bars in a London vault and custodied by ICBC Standard Bank.

The investment objective of the GraniteShares Platinum Trust is to replicate the performance of the price of platinum, less trust expenses (0.50%), according to the official GraniteShares’ website.

The physically-backed methodology prevents investors from getting hurt by the contango structure of the platinum market, contrary to ETFs using futures contracts.

Also, the structure of a grantor trust protects investors since trustees cannot lend the platinum bars.

PLTM is the lowest-cost ETF on the market, with an expense ratio of 0.50%. PLTM competes with the Aberdeen Standard Physical Platinum Shares ETF (NYSEARCA:PPLT), which was created in October 2010, which is, however, more expensive, considering that its expense ratio is at 0.60%.

Speculative positioning

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Source: CFTC, Orchid Research

The speculative community cut their net long exposure to NYMEX platinum slightly in the week to September 29, according to the CFTC.

However, this comes after a decline of 458,850 oz in the week to September 22, the largest decrease in the net spec length since the height of the COVID-19 crisis in Mach.

The recent changes in platinum’s spec positioning lead us to think that speculative sentiment remains negatively skewed toward platinum.

Encouragingly, platinum’s spec positioning becomes increasingly lighter, with the net spec length at just 18% of open interest. When spec sentiment shifts positively, the rebound in platinum prices should be powerful.

Implications for PLTM: Spec sentiment toward NYMEX platinum is negatively biased, which could suggest additional speculative selling pressure in the weeks ahead, pushing the NYMEX platinum price and thus PLTM lower.

Investment positioning

Source: Orchid Research

ETF investors added 14 koz of platinum to their holdings in the week to October 2, according to our estimates. This marked the 3rd straight week of inflows.

Platinum ETF holdings are at an all-time high, based on our records from 2009. This clearly highlights the positive turn in investor sentiment toward platinum since June.

We think that investors are willing to look beyond the 2020 supply/demand picture. Indeed, although the platinum market is due to record a large surplus this year (which would be even bigger in case of no ETF investment demand), the market is due to re-balance and tighten in the coming years.

Although automotive demand from ICE vehicles is due to declining in the long run due to a shift toward EV sales (containing no PGM), the hydrogen revolution could be bullish for platinum demand over the next decade. According to EnAcumen, an expert in hydrogen energy technologies, the global fuel cell vehicle (FCV) fleet could total 6.5 million units in 2030, representing 6.1 million cars and 400k trucks/buses.

Chart, bar chart Description automatically generated

Source: UBS

Based on their projections, total FCVs could represent around 2moz of annual platinum demand, representing about 25% of the current annual platinum supply.

Implications for PLTM: Because platinum remains abnormally cheap vs palladium judging by historical standards, it is not a surprise to see ETF investors jumping in on the long side of the platinum market, which partly offsets platinum’s fundamental weakness in the short term.

Seasonality check

Source: Bloomberg, Orchid Research

When capturing the seasonal component of NYMEX platinum over the past two decades, we find that seasonality turns negative from October to December. From this perspective, PLTM is vulnerable to seasonal price weakness in Q4.

Closing thoughts

Despite its recent rebound, we remain cautious on PLTM over the near term.

Although we are willing to admit that platinum is too cheap vs palladium and that platinum’s fundamentals are due to improve in the long run, we think that additional selling pressure in PLTM in the final quarter of the year cannot be ruled out, in part caused by negative seasonal dynamics and a possible appreciation in the dollar.

From this perspective, we currently play defense, willing to wait a little longer and take advantage of possible price weakness in the months ahead to reinforce our long-term bullish exposure to PLTM.

Once we have a clearer signal that a bottom has been reached, we will update our readers.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.

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