How Trade War & Other Issues Took the Sheen Off Platinum ETF

July 8, 2018

Washington (July 8)  As the Trump administration continued to cross swords with Europe, Mexico, Canada and China over trade, several investing corners came under pressure. One of the areas is platinum. Platinum prices dived this week to the lowest in almost a decade , per Wall Street Journal.

ETFS Physical Platinum  PPLT is down about 11% this year (as of Jul 3, 2018) while it lost about 8% in the past three months. Below we highlight the direct and indirect factors that led the fund, which tracks the price of physical platinum, into losses.

Auto Tariffs: A Key Deterrent

Notably, platinum has considerable usage in the auto industry for manufacturing catalytic converters to clean exhaust emissions. About 44% of the metal's annual demand originates from the auto industry. Now with the Trump administration initiating a national security investigation into auto imports, global car demand will definitely take a hit.

Plus, the enactment of steel and aluminum tariffs is another concern. As steel and aluminum are crucial for the production of cars and trucks, the tariff enactment will likely drive the sale price of vehicles substantially (read: Trade War Tensions Flare Up: Must-Watch ETFs & Stocks ).

Moreover, the United States will now enact a  25% tariff  on China's $34 billion worth of goods starting Jul 6. In retaliation, China announced plans to levy tariffs on the same amount of goods starting the same date. China's retaliation includes a 25% tax on U.S. car imports, implying another threat to the global car industry.

Meanwhile, the European Union has cautioned the United States that the levying of import tariffs on cars and car parts will result in a retaliation on $ 294 billion of U.S. exports (read: How Europe ETFs are Susceptible to U.S.-China Trade Spat? ).

Likely Slowdown in Global Growth

The escalation of the trade spat sparked off concerns about the likely slowdown of global growth. The International Monetary Fund (IMF) expects global growth to slow down by 2020 as " major economies are flirting with trade war ." This could derail the economies from their reform agenda.

Since global economic growth will likely be under pressure, consumption of commodities will slow down. This is another factor that hurt " cyclical precious metals such as platinum and palladium" (read:  5 Sector ETFs Most Exposed to Trade Tensions ).

Bank of America Merrill Lynch estimates that only U.S. car tariffs at 25% could dent Euro area GDP by at least 0.3%. In any case, the Euro zone growth momentum has hit a soft pitch lately. Its economy grew 0.4% sequentially in Q1 of 2018, compared with 0.7% expansion in the previous period.

Moreover, as per bullionvault, Western Europe is normally the biggest market for diesel-engine cars. But petrol cars outdid diesel ones in 2017 for the first time since 2009 in Western Europe, according to ACEA's 2017 Economic and Market Report. Since platinum is a key component for diesel engine vehicles' catalytic converters, the declining demand for diesel cars probably have weighed on platinum too.

Hawkish Fed  

Since the Fed is on a hawkish mode and expects to raise rates this year faster than expected, U.S. treasury bond yields went up. This weighed on non-interesting bearing assets like precious metals. Moreover, the U.S. dollar has gained considerably as evident from a 4.4% year-to-date gain in Invesco DB US Dollar Bullish UUP . Since commodities are priced in the greenback, platinum prices tumbled this year.

Declining Jewelry Demand From China

Chinese jewelry sales account for about 16% of global platinum consumption. The demand has been on downtrend since 2013. Analysts and jewelers believe that " a lack of trust in platinum, as well as the higher cost of exchanging platinum pieces for cash, make it a less appealing store of value for older buyers", noted Reuters. Plus, their increasing preference for gold has also been eating into platinum demand to some extent.


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