PLATINUM TODAY: Potential short-covering rally coming

Turning  to the platinum market, Northam Platinum chief executive Paul Dunne gave a weak outlook on the platinum price, mainly for three reasons - the advent of the battery-powered electric vehicle (EV), the “Dieselgate” scandal and lower demand in China for platinum jewellery. The threat of a complete substitution from a traditional internal combustion engine (ICE) to battery power is gaining traction. 

Older diesel engine vehicles face a strict ban from some areas in the German cities of Stuggart and Dusseldorf. The ruling could set a precedent for other cities and potentially lead to similar action across Europe. Paris, Madrid, Mexico City and Athens have all pledged to ban diesel vehicles from city centers by 2025. Carmakers including VW-owned Porche and Toyota have signaled they will move away from diesel technology while Swedish carmaker Volvo aimed to produce only electric vehicles by 2019. 

“Dieselgate”  continues to reverberate in the auto industry. Only recently, Daimler was forced to recall around 238,000 vehicles in Germany after it was found they were fitted with illegal software. Consumers preference has shifted from a diesel-engine vehicle to either a petrol, electric or a hybrid where there are less platinum holdings. Higher taxes on diesel cars and strict environmental policies have indirectly affect consumers’ choices too. 

Meanwhile, the long-term prospect of platinum as an investment asset has failed to attract new funds. Global economic growth has encouraged investors to look at other alternatives where there are better returns. Corruption clampdowns and strict capital control in China has reduced the appeal of investing in the precious metals, including platinum. 

Nymex speculators has been bearish with their positioning. Having just recovered from the 2018 low at 1,462 contracts, platinum’s net long fund position (NLFP) has come under fresh selling pressure again in the week running to June 5. The fresh buying dried up and gave in to 584 contracts of profit-taking, while short selling has confidently added to their bearish exposure. 

Since the March 13 low at 16,269 contracts, the gross short position has grown to 43,093 contracts. Given the extremely one-sided bearish trend, our contrarian view suggests that the selling will soon reach an impasse and platinum prices could benefit higher on the back of a short-covering rally. 

After many weeks of divestment, long-term ETF investors have started to add to their holdings again with 9,141 oz of fresh buying, as seen on June 8. Buying came from ETFs US and DB ETC and as a result, platinum’s ETF holdings rose to 2,348,415 oz.  

Conclusion
Even though platinum remains very bearish, we think that most of the negative elements have been priced in and that selling has run its course. Instead, the one-sided bearish sentiment suggest that a short-covering rally is in store; the backdrop should warrant a short-to-medium-term hypothetical trading stance of buying on the dips near $850-870 per oz, with a stop-loss at the January 2016 low.