ETF Securities: Platinum and Palladium Supply Risks Rise

ETF Trends

Precious metals prices declined across the board last week, as expectations of reduced Fed stimulus gathered pace. While consensus appears to expect the Fed to reduce its bond buying program as early as September, this week’s Fed meeting has the potential to shake this faith as rising bond yields and subdued inflation give the Fed scope to follow the IMF’s advice to maintain the program until growth has a firmer footing.

With futures positioning in gold and silver highly negative, any gold or silver price positive news has the potential to drive a strong short-covering rally. It may be too early for such news to sustainability improve the fundamental outlook for these metals, but it is something investors’ should monitor.

In the meantime, power problems at South Africa’s power provider, Eskom, and labor issues at the mines will likely continue to exert downward pressure on new supplies of platinum and palladium and upward pressure on their prices.

Platinum and palladium production drops 13% in April, Eskom highlights new power risks. South African power supplier, Eskom, reported last week that power demand exceeded supply by the largest margin since 2008, raising concerns about potential power shortages, which historically have led to sharply higher PGM prices. In addition, Statistics South Africa has reported a sharp fall in PGM production in April from a year earlier as the work stoppages stemming from union wage negotiations wreak havoc for producers. Last week no deal was agreed, with the largest union, the AMCU, delaying a decisionto strike (until Friday). Supply side issues are likely to remain the major driver of PGM prices in coming weeks as production uncertainty continues to exacerbate 2013 deficit expectations.

Silver volatility moderates as COMEX stocks stabilize, indicating potential price upside. Silver volatility has eased significantly after spiking above the 50% level on a rolling 30-day annualized basis. There have been six previous instances that this has occurred over the past decade and on average over the ensuing three month period, silver has rallied by around 9%. Meanwhile COMEX stockpiles have begun to stabilize, indicating that an industrial demand recovery may be underway. However, until inventories begin to turn down, the performance of silver is likely to remain beholden to the direction of the gold price, as the correlation between the two metals remains near decade high levels.

India’s government reports gold imports tumble nearly 75% after tax hike. According to the Indian Ministry of Finance, gold imports slumped from an average of US135 million per day in mid-April to just US$36 million per day in early June 2013. The Indian government increased its gold import duty to 8% from 6%, in order to address its current account deficit problem, which officials have indicated is largely driven by gold imports. Physical gold purchases from the world’s second largest consumer are likely to remain stagnant as the Indian Rupee has recently reached record high levels against the US Dollar, further increasing the cost of purchasing gold.

Key events to watch this week. The FOMC meeting will be the main event this week, likely overwhelming the impact of most data releases.

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