FxWirePro: Headwinds/prospects of Platinum prices in 2018 and investment flows

The long-term price outlook for platinum aligns with current forward prices, and we see the precious metal fairly priced at current levels.

More than palladium, platinum remains heavily correlated to gold prices, and current monetary trends will prove a headwind.

The speculative sentiment, gauged from the CFTC’s Commitment of Traders report, has turned decidedly bearish in the past weeks.

Supply: Total supply (mine production and recycling) is set to fall moderately over our 6– 12m forecast horizon, from 7,790koz in 2017 to 7,770koz in 2018e. In theory, this should prompt a moderately bullish outlook, but physical and investment demand remains subdued. This explains our rather neutral view on platinum at these levels.

Demand: Although global light vehicle sales are set to slow, this should be offset by tightening emissions regulations, which are expected to increase the PGM loading per unit. The automotive demand outlook remains less compelling for platinum due to its exposure to the diesel technology and related emissions scandal. Jewelry demand is set to remain weak as the Chinese prefer gold. Total demand is expected to drop from 7,810koz in 2017 to 7,750koz in 2018 leaving a relatively small surplus of 20koz, which is clearly bearish.

Investment themes and flow: Investment flows are a key factor in determining price trends and macroeconomic views are critical in formulating the strategy. Retail investment in platinum through ETP holdings remains robust and is evidence that this sector is more inclined to buy and hold it for the long term, while net positioning on NYMEX is falling as sentiment is negative. While we believe the US dollar cycle is maturing after a six-year run and monetary policy divergence is likely to start narrowing, a headwind for platinum is a period of sustained rising interest rates. This will be felt through subdued investment flows and adds to the bearish pressure.

Fundamentally, platinum remains exposed to diesel technology, and in spite of tightening regulations, diesel market share in Europe is in a structural downtrend. Jewelry demand has been weakening as Chinese consumers prefer gold and lower-purity items grow more widespread.

Higher autocatalyst recycling and a weaker South African Rand (ZAR) will further limit significant price rallies. We forecast platinum spot prices at $950/oz in six months.