Five Charts Show Platinum Markets Coming to Life

(Bloomberg) --

After months of being ignored in favor of market darling palladium, platinum is finally getting some attention from investors.

The metal, which is mostly used to make jewelry and reduce emissions from car exhausts, is trading near the highest since May and money is pouring into platinum-backed exchanged-traded funds. Prices have gained as expectations for tough wage negotiations this year in top producer South Africa raised the threat of supply disruptions, and platinum's cheapness relative to other precious metals is also prompting a second look by investors.

“Platinum has been beaten up too much and became too cheap,” said Georgette Boele, a senior foreign-currency and precious-metals analyst at ABN Amro Bank NV. “The fundamentals are not as negative as perceived.”

Read: Platinum Poised to Climb After Breaking Resistance

Here are some charts that show how the mood in the platinum market is changing:

It's Cheap

Palladium's record-setting run early this year catapulted the metal's premium over platinum to a fresh high in March. The big gap is spurring speculation that carmakers may start working toward substituting platinum in for palladium in their autocatalysts.

Read: Rally in One of the Hottest Metals Is Seen Fading This Year

One of the reasons platinum fell out of favor was the dimming outlook for diesel-fueled vehicles, which mainly use the metal in their autocatalysts. (Palladium is favored in gasoline cars.) However, manufacturers can take steps to use more platinum instead, if there's enough incentive to make the change. There are also encouraging signs that diesel's share of the auto market is stabilizing.

Platinum is also historically cheap relative to gold, although the spread has started to narrow in recent weeks. Platinum for immediate delivery traded at about $902 an ounce on Friday, while gold was at about $1,295 an ounce. The gap between the two metals should narrow to $350 in the medium term, said Ole Hansen, head of commodity strategy at Saxo Bank A/S.

Strike Threat

Platinum supply has outpaced demand for the past two years and the World Platinum Investment Council has forecast another global surplus this year of 680,000 ounces. However, that may change if the South African wage talks later this year break down and workers down tools for an extended period of time.

South Africa's mining industry has a history of lengthy and sometimes violent protests. Producers are already bracing for tough negotiations, although top miner Anglo American Platinum Ltd.'s chief executive officer, Chris Griffith, said he's not expecting a long disruption.

Griffith also said there's no prospect of more new mines starting up anytime soon, even as South African producers benefit from higher prices for palladium and rhodium, which they dig up alongside platinum.

Getting Physical

In one of the clearest signs of changing sentiment, holdings in platinum-backed ETFs have surged dramatically. The funds have added about 20 tons of metal this year and reached a record earlier this month.

Read: U.S. Coin Collectors Pile Into Platinum as Prices Rally: Chart

Going Long

Data from the U.S. Commodity Futures Trading Commission also points to positive sentiment on platinum. Hedge funds have held a net-long position since the week ended Feb. 26. The bullish platinum bets reached a one-year high in late March, although the net-long position pulled back somewhat in the most recent data.

--With assistance from Felix Njini.

To contact the reporter on this story: Rupert Rowling in London at rrowling@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Liezel Hill, Nicholas Larkin