PLATINUM TODAY: Potential short-covering rally coming

Short term: Flat
Medium term: Flat
Long term: Up
Resistances:
R1 903 20 DMA
R2 911 50 DMA
R3 940 200 DMA
R4 1,195 2016 high
Support:
S1 900 Psychological support
S2 892 June 5 low
S3 877 May 21 low
S4 811 Jan 2016 low
Stochastics:
Bearish
Legend:

BB – Bollinger band
COT – commitments of traders
Fibo – Fibonacci retracement level
HSL – horizontal support line
SL – support line
MACD – moving average convergence divergence
DTL – downtrend line
UTL – uptrend line
H&S – head-and-shoulder pattern
RSI – relative strength index


Analysis

  • Platinum started poorly on Wednesday June 13 after a technical rejection from the 20 DMA.
  • It traded as low as $892 per oz but managed to close the day with a doji daily candle, which signifies some indecision in the market.
  • On a positive note, sellers failed to take platinum below the June 5 low and formed what may be a bullish double-bottom formation (see chart).
  • Still, the technical indicators such as the daily RSI and stochastic lines are far from convincing.
  • The daily RSI still trades below the median line while the stochastic lines offer very little upside bias for now.
  • Given the current technical backdrop, we expect the platinum price to remain under pressure in the short term. But we are open to the idea of a major reversal if platinum can break and close above the 20 and then 50 DMA.   
Macro drivers
The US Federal Reserve implemented its second rate increase in 2018. Fed chairman Powell painted a hawkish view by stating that the US economy is doing very well and expects four rate rises in 2018 to be likely. The Fed will also hold press conferences after every meeting from January 2019 with the aim of improving clarity. 

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.  

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

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