Welcome to Orchid’s Platinum Weekly report, in which we discuss platinum prices through the lenses of the GraniteShares Platinum Trust (PLTM).

PLTM has rebounded by roughly 30% since it crashed to an all-time low of $5.76 per share on March 19.

The rebound in platinum prices has been driven by technical short-covering, surging supply disruptions, and expectations for a global economic recovery once COVID-19 is contained.

While further upward pressure in PLTM cannot be ruled out in the immediate term, we do not believe that the rebound will prove sustainable because the platinum market is still in a bearish posture, namely in a physical surplus.

Having said that, we are bullish on PLTM in the very long term, holding the view that the low platinum price environment is unlikely to last forever. CPM envisages a return to deficit in 2024-2025. We think that PLTM could form an ultimate low before an actual return to a physical deficit. We are not in a rush to boost our long position in PLTM right now. We prefer waiting for more price downside.

For Q2, we maintain our trading range forecast of $5.50-$9.50 per share for PLTM for Q2.

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Source: Trading View, Orchid Research

About PLTM

PLTM, which was created in January 2018, is directly impacted by the fluctuations of platinum spot prices because the Funds physically holds platinum bars in a London vault and custodied by ICBC Standard Bank.

The investment objective of the GraniteShares Platinum Trust is to replicate the performance of the price of platinum, less trust expenses (0.50%), according to the official Graniteshares’ website.

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The physically-backed methodology prevents investors from getting hurt by the contango structure of the platinum market, contrary to ETFs using futures contracts.

Also, the structure of a grantor trust protects investors since trustees cannot lend the platinum bars.

PLTM is the lowest-cost ETF on the market, with an expense ratio of 0.50%. PLTM competes with the Aberdeen Standard Physical Platinum Shares ETF (PPLT), which was created in October 2010, which is however more expensive considering that its expense ratio is at 0.60%.

Speculative positioning

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Source: CFTC, Orchid Research

The speculative community slashed markedly by the equivalent of 125 koz. (5% of open interest, 2% of annual supply) its net long position in NYMEX platinum in the week to April 21, according to the CFTC.

This was the 7th straight week of decline in platinum’s net spec length. The NYMEX platinum price dropped 3.4% over the corresponding period.

Since the start of the year, speculators have liquidated by the equivalent of 2.444 million oz. of net long positions in NYMEX platinum, representing a massive 29% of annual supply. This is, therefore, not a coincidence that the NYMEX platinum price is down 19% YTD.

Platinum’s spec positioning is now neutral, with a net spec length at 31% of open interest. Risks of supply disruptions could elicit some fresh speculative buying despite the recession in the global automotive industry.

Implications for PLTM: Although it is hard to predict when spec positioning will swing, we believe that supply disruptions could shift positively speculative sentiment in the near term. This could be potentially bullish for the NYMEX platinum price and thus PLTM.

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Investment positioning

Source: Orchid Research

ETF investors liquidated their platinum holdings by 43 koz. in the week to April 24, marking a 5th straight week of net selling.

ETF sentiment toward platinum has shifted negatively since the Covid-19 crisis, reflecting expectations for a larger refined market surplus caused by a recession in the global automotive industry. The surge in supply disruptions in South Africa has failed to shore up sentiment among financial players.

The World Platinum Investment Council (WPIC) forecasts a surplus of 119 koz. in the platinum market in 2020.

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Source: WPIC

The platinum market has been in a physical surplus for the last 15 years, according to CPM Group. The bearish fundamental posture of the platinum market is consistent with its bearish price action.

CPM expects the surplus to continue in 2020 and the coming years, driven by recessionary conditions in the automotive industry. From 2024-2025, however, CPM expects a return to a structural deficit in the platinum market.

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CPM’s estimates exclude investment demand for platinum and focus only on total supply versus physical fabrication. The rationale makes sense because CPM aims at assessing the real fundamentals of the market. The consideration of investment flows in the supply/demand balance would flaw the underlying fundamental picture.

Implications for PLTM: The decline in investment demand for platinum points to a bearish shift in sentiment. Given the presently weak fundamental backdrop, this would weaken further the NYMEX platinum price, which would, therefore, be negative for PLTM.

Closing thoughts

We expect a little more upward pressure for PLTM in the near term due to surging supply disruptions, which could potentially swing investor sentiment positively and elicit financial demand for platinum (futures and ETF).

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However, the global recession in the automotive industry is likely to deepen the physical surplus in the platinum market despite a likely contraction in mine supply caused by the consequences of COVID-19.

Against this, we do not believe that the rebound in PLTM will prove sustainable this year.

We prefer to be patient and reinforce long positions in case of a significant price dip. We view our long position in PLTM as a very long-term bet.

We expect PLTM to trade between $5.50 and $9.50 per share in Q2, suggesting some juicy opportunities for swing traders.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.