What to do with PGMs?

PGMs are usually at the top of fundamental analysts recommendations given the seemingly compelling S&D balances.  Performance, however, has hardly been stellar, with palladium just above levels at the start of the year, and platinum quite a bit below.

Perhaps this misses some of the relative performance of these metals.  Platinum has far outperformed gold as posted here, while the platinum/palladium ratio continues to sink to very low levels (with this opportunity highlighted in this post.).

It seems likely that deficits for platinum and palladium will be larger than projected by JM a few months ago.  First, its likely that JM have underestimated the strength in auto production, which has been incredibly strong in the last few months.  Key gasoline vehicle markets (re: palladium) have been strong mostly on the back of exceptional strength in China.

It also seems that European markets are perhaps a little less-bad than expected.  Substitution to palladium in diesel catalysts and a lower diesel market share have been weights on platinum demand.

But some areas are starting to show some life, like truck demand, which is in part supported by changing environmental legislation, which should also support platinum loadings in catalysts.

As mentioned before, it also seems that Johnson Matthey are underestimating Chinese platinum demand in 2013 given the strength of jewellery sales and the big increase in Shanghai Gold Exchange sales.

That said, easily the biggest driver of the change in demand in platinum has been from ETF demand, specifically from flows into the ABSA South African ETF introduced this year.  So far, total platinum ETFs have seen and inflow of over 1million ounces.  Palladium have seen a much more subdued 275koz, with most of that at the start of the year.

For platinum, strong physical investment interest has failed to create price tension because it hasn't created availability concerns in other parts of the supply/demand chain.

That point may now be closer. But that said, there is a risk that massive platinum ETF inflows this year create an investment overhang in 2014, with the S&D for platinum not so compelling without further investor interest.  Palladium had a similar experience in 2010/2011, but doesn't have this problem heading into 2014.

Stocks of palladium still appear to be quite high compared to consumption, with Russian stockpiles seemingly shifted elsewhere.  But the key point is that there is a very strong consensus that this is a metal will be in multi-year deficits.  Therefore, investors and consumers alike are happy to hold onto inventory at current prices.

All this would suggest that palladium is the metal to go for in 2014.  Thats fine for a view over a whole year.  But for short horizons, platinum does appear to have a major positioning advantage.

Platinum has seen a large increase in speculative shorts in the last few weeks, which largely seems to be in sympathy with the pressure on the gold price.  But the reality is the reasons that gold is heading lower shouldn't really weigh on platinum so much.  Subsequently, platinum could quite easily see a short covering rally without any assistance from gold.

Palladium, however, doesn't have this dynamic to push prices higher.  Indeed, long interest in this metal has been incredibly sticky.

The power of these short covering rallies should not be underestimated.  During the last episode, platinum hugely outperformed palladium, with the pt:pd ratio jumping well above 2.

If 2013 proves to be a guide to next year, it does seem like making relative bets on PGMs is the better way to go than absolute price levels.  Shorting platinum was a winner, but investors would have been better off shorting gold.  The palladium price went up a little, but going long palladium vs. platinum yielded much better results.

For a 3 month view, platinum would be my pick as the outperformer, perhaps best played via long platinum/short palladium.