Platinum oversold as price tanks

London (Oct 2)  It's rather remarkable in light of the year's events. The platinum price (January delivery) reached a five-year low Wednesday ($1,263/oz.) highlighting a precipitous few months for the precious metal, largely used in catalytic converters.

The selloff in platinum - with ETF holdings dropping alongisde - started in August and has been relentless since. Platinum traded near $1,500/oz back in late July and early August, but it has since crumbled to under $1,300/oz. Many will recall that platinum climbed, if tentatively, on the back of a crushing strike in the South African platinum mining sector earlier in the year, which was eventually resolved but only after months of long-fruitless negotiation.

Through the strike platinum miners turned to stockpiles, among other sources, to supply customers and the prospect of a supply crunch, if not during the strike then after, seemed very real.

Clearly that possibility has since been discounted - at least for now - given platinum's fall.

But to what depths might the platinum price go? Some argue they aren't likely to fall much lower.

The sell-off, in light of strong (or recovered) auto sales in the U.S. and ever increasing adoption of cars in China, puts firm demand behind platinum, albeit with the caveats that efficiency of use of platinum has improved over the years, palladium (cheaper) can play as partial substitute and Eurozone car sales are weak.

Meantime, you can add that the strike in South Africa certainly made mining platinum a costlier endeavour in terms of salaries and benefits. Likewise mines go ever deeper and with few new deposits ramping up at least in the short-term supply is constrained. And at these prices or lower it will be increasingly harder to justify building mines around some of the new larger deposits.

So, while PGM-watchers haven't writen off more price pain, they tend to favour some bottom or near-bottom in the price of platinum forming at the moment. "While it is still hard to call a bottom, we think the selloff has largely run its course," Standard Bank's Charles De Wet recently remarked to the WSJ (paywall). Likewise, UBS has told clients that platinum below $1,300/oz is a "buying opportunity." And in the same vein, HSBC's James Steel said that at current prices the precious metal is oversold.

Still the price of gold weighs. For platinum to reverse course in the coming months, if the gold price remains moribund or falls lower (<$1,200/oz!), then markets will have to decide it's time for platinum to decouple.

Source: Mineweb