SPPP: An ETF holding the Leading Platinum Group Metals (NYSEARCA:SPPP)

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Four precious metals are traded on the COMEX and NYMEX divisions of the CME. While gold is the undisputed leader among precious metals, silver is a highly speculative metal that attracts waves of trend-following market participants when the price moves. Trade in gold and silver on the COMEX.

The platinum group metals include platinum, palladium, rhodium, osmium, iridium, and ruthenium. Platinum and palladium are traded on the NYMEX while the other PGMs are only traded on the physical market due to low liquidity. Meanwhile, platinum and palladium are far less liquid than gold and silver as futures attract less speculative interest as consumers and producers are the main hedging markets. However, the lower open interest and volume levels increase the potential for price volatility in the platinum and palladium futures markets.

The Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP) contains platinum and palladium Bullion, which gives investors a direct interest in the price development of precious metals and highly industrial metals.

In recent weeks, rising US interest rates and a strong dollar index have weighed on many commodity prices, and precious metals are no exception.

Platinum stays in a funk

Platinum futures on nearby NYMEX April peaked at $1,117 an ounce on January 11, 2023 as they ran out of steam on the upside.

Nine Month Chart – NYMEX Platinum Futures (Bar Chart)

The chart shows platinum’s fall in April to $903.90 on February 27, down 19.08%. The longer-term picture shows that price failures are nothing new for the rare precious metal.

20 Year Chart – NYMEX Platinum Futures (Bar Chart)

The 20-year chart illustrates platinum’s continued downtrend with lower highs and lower lows. At around $950 on March 9, platinum futures are less than half the price of the 2008 record high of $2,308.80 and less than $350 above the March 2020 low of $595.90. The bottom line is below $1,000 per ounce; Platinum remains in a bearish funk. A move above the February 2021 high of $1,290.60 would break the 15-year bearish trend.

Palladium’s volatility has been wild

In March 2022, nearby palladium futures rose to a record high of $3,380.50.

Long Term NYMEX Palladium Futures Chart (Bar Chart)

The chart from the 1970s shows the rally that took palladium to dizzying heights over the past year. Bull markets rarely move in straight lines, and the higher they rise, the steeper they fall, as was the case with the palladium market. From the March 9th level of $1,382, active month June palladium futures have fallen to well under half the price of last March. Prior to 2018, however, the record high was $1,035 an ounce, the 2001 peak, which is the long-term technical support level. While platinum has been in a bearish trend for a decade and a half, palladium’s bull market has lasted for over two decades.

The reasons for the PGM volatility

Platinum and palladium are volatile metals as they suffer from low liquidity. Open interest is the total number of open long and short positions in a futures market. The PGMs are far less liquid than gold and silver, their valuable cousins. From March 8th:

• COMX gold futures open interest was 459,423 contracts, equal to 45,942,300 ounces. At $1,835 an ounce, the value was $84.3 billion.
• COMX silver futures open interest was 128,469 contracts, equal to 642,295,000 ounces. At $20 an ounce, the value was $12.85 billion.
• NYMEX platinum futures open interest was 68,512 contracts, equivalent to 3,425,600 ounces. At $950 an ounce it was valued at $3.254 billion.
• NYMEX palladium futures open interest was 12,624 contracts, equivalent to 1,262,400 ounces. At $1,362 an ounce, the value was $1,719 billion.

As you can see, gold and silver are much more liquid than platinum and palladium. 2022 mine production estimates for the four metals further explain the PGM’s low liquidity:

• Gold production was 3,100 tonnes or 99.67 million ounces.
• Silver production was 26,000 tonnes or 835.9 million ounces.
• Platinum mine production was 190 tonnes or 6.11 million ounces.
• The palladium mine’s offering was 210 tonnes or 6.75 million ounces.

Liquid markets tend to be far less volatile than illiquid ones. Liquidity leads to participation. When futures, forwards, and physical markets like platinum and palladium experience significant price movements, bids often disappear on the downside, and bids evaporate during explosive rallies. Palladium’s 2022 rally to $3,380 was a function of liquidity concerns, as was platinum’s fall below $600 an ounce in March 2022.

The case for higher PGM prices

While liquidity is a challenge, palladium’s correction and platinum’s bearish price action are creating an opportunity due to the low price level relative to gold, silver and other commodities. Palladium below $1,400 an ounce and platinum at the $950 level limit the downside potential to less than the upside potential seen at their record highs of 2022 and 2008.

Meanwhile, the following factors provide fundamental support for platinum and palladium:

• South Africa and Russia supply the lion’s share of platinum, palladium and other platinum group metals. South African production is primary, with mines deep below the surface causing very high production costs. In Russia, PGM production is a by-product of nickel production in the Norilsk region of Siberia.
• Platinum and palladium are green metals that help rid the environment of toxins in cars and other fossil fuel vehicles. Platinum and palladium are critical metals in catalytic converters, and petrochemicals, oil refiners, and fiberglass manufacturers require PGMs in their catalytic converters.
• Platinum, palladium and the other PGMs are dense metals with very high boiling points, making them critical to many consumer products including but not limited to computers and electronics, turbine blades, spark plugs, dental fillings, musical and medical instruments and appliances, fuel cells, jewelry and even chemotherapy drugs.
• Russia has used its commodity exports as a weapon against “unfriendly” countries that support Ukraine. PGMs are critical metals for the technology, which could lead to embargoes and shortages.
• Low liquidity could favor investors during a bull market as a lack of sellers could lead to explosive rallies and price extremes.

Risk-reward dynamics favor platinum group metals at current price levels in March 2023.

SPPP – An investment option for the PGMs

The physical market for bars and coins is the most direct way to invest in platinum and palladium. NYMEX futures offer an alternative as they feature a delivery mechanism that allows investors and traders to obtain physical platinum and palladium from exchange warehouses.

Meanwhile, the Sprott Physical Platinum and Palladium Trust (SPPP) holds the metals. The latest portfolio includes:

SPPP Holdings as of end February 2023 (Sprott.com)

The Royal Canadian Mint, a world-renowned precious metals depositor and refiner, is the ETF’s precious metals custodian. The London Bullion Market Association approves the Royal Canadian Mint as a good delivery bar.

At $11.69 per share on March 9, SPPP had $112.74 million in assets under management. SPPP trades an average of 66,431 shares daily and charges a 0.95% management fee. The fund summary states:

Fund profile for the product SPPP ETF (Seeking Alpha)

The “fully assigned” gold bar means that each bar has identifying features such as bar numbers and refinery marks.

SPPP ETF Product Chart (Bar Chart)

The chart shows the performance of SPPP over the last few years:

• In 2020, the SPPP was 23.8% higher
• In 2021- SPPP was 21.8% lower
• In 2022- SPPP was 2.4% lower
• In 2023 on March 8: At $11.69, the SPPP is down 14.1% from where it was on December 30, 2022

SPPP is an option for those looking to invest in platinum and palladium. The ETF offers exposure to leading PGMs without metal premiums, rebates, storage or insurance concerns. The ETF trades on the NYSE Arca and investors can hold SPPP in standard stock portfolios.

SPP is trading at the lowest level since March 2020, which could be an opportunity to buy the decline in volatile and rare precious metals with various industrial applications.