The fundamentals of the two metals are substantially different from each other, the recent recoil in the metals sector saw them moving in tandem.  In time, their different market profiles will see the two price paths diverge again, but the recent steadiness in the premium suggests that the dust is settling after the recent storm.

To recap; although both gold and platinum have an important common feature in that they have both been relying to varying degrees on investment activity for keeping their prices at these elevated levels, their underlying fundamentals differ. 

The jewellery market typically accounts for 70-80% of fabrication+bar hoarding gold demand and in 2009 took up 71% of the total.  In the platinum market, jewellery typically accounts for 33% of industrial and (non-ETF) investment demand, taking up 35% of the total last year (all figures derived from GFMS Surveys and quoted on a gross basis). 

The auto sector, by contrast, is the largest platinum consumer, taking up an average of 45% of platinum demand over the past ten years, and accounting for 43% of total last year.  On this point it is worth remembering that the European sector is more important to platinum than other regions because of the high market share taken up by diesel in the European sector; in 2009 Europe accounted for 46% of automotive platinum demand, after an average of 47% over the past ten years.  Furthermore platinum is losing market share to palladium in the diesel sector as a result of advances on fuel technology.

The European auto sector therefore accounted for 19% of global platinum industrial and non-ETF investment demand last year and the burgeoning concerns over the state of Europe were a vital key to the massive liquidation on NYMEX in the second half of May (along with, of course, technically-driven trading and stop-loss selling orders).  CFTC figures show that In the week to 25th May the net speculative platinum long on NYMEX fell from 41.9 tonnes to 28.1 tonnes, a fall of 13.8 tonnes or 442,000 ounces.  By far the majority of this move was the liquidation of 12.8 tonnes or 411,000 ounces, with the addition of a few fresh shorts.

This was far and away the heaviest platinum liquidation on record on the Exchange.  The second largest liquidation was of 7.8 tonnes, back at the end of July 2007 when the price had sustained a $60 fall from $1,333 before starting a recovery.  (The sector as a whole was retreating at that point under profit taking, following a rally stemming from sub-prime concerns.  Financial risk has been troubling these markets for longer than we sometimes remember).

The net long fell to just below 28 tonnes towards the end of May but has been relatively stable since.  When the latest bull market started, the net long on NYMEX was just over 11 tonnes and the subsequent record was 45.4 tonnes in mid-April this year.  The average over the period is 26.3 tonnes, suggesting that the recent liquidation has cleared out virtually all of the speculative froth in the market.

Fundamentals, speculation and investment have all combined to take platinum up from its low of $763 on 27th October 2008 to its recent high on 26th April of $1762.  The subsequent sharp correction prompted a fall to $1,492 on 21st May; since then it has recovered 31% of the decline and the market appears to be on a much more even keel.

Speculators have been swept away, but are showing some tentative interest once more.  What of the ETF investors?  Here the situation is rather more uncertain.  In the fall from the April high to the May low there were signs of some bargain hunting in the market, with odds and ends of metal being picked up here and there.  There were also pockets of sales, and the net result was an inflow of just $1.01 million.

The subsequent recovery period has also demonstrated that investors are not yet ready to commit again to this market.  There has been a small net outflow of funds as Europe continues to command attention.

For the time being, then, especially given the time of year, it is perfectly possible that inflows will remain muted.  The performance of the Mitsubishi-led precious metals ETFs in Tokyo, which launch on Friday 2nd July, will be interesting given the historical predisposition of Japanese investors towards platinum.  For the time being, though, the metal looks as if it is taking things steadily and finding its feet and the comparatively low level of activity in the ETFs suggests that most of the investors left in this market have firm hands.

Courtesy of Mineweb.com