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ANALYSIS - Platinum ETFs could soften blow from lower auto demand

NEW YORK (Reuters) - A proposal for the first-ever U.S. exchange traded platinum fund would give the white metal a shot in the arm and fill some of the void left by lower demand from the beleaguered auto sector.

Recently assembled Chevrolet Malibus and Saturn Auras are loaded into railcars for transport around the country outside the General Motors Fairfax Assembly Plant in Kansas City, Kansas April 1, 2009. REUTERS/Dave Kaup/Files

Investment in platinum has risen even as demand from the auto industry fell for the first time since 1999. Some traders believe the market has hit bottom and a broad economic recovery is in the making that will stimulate more demand from car makers.

Platinum is mainly used in autocatalysts to clean exhaust fumes from vehicle emissions. That accounts for more than 60 percent of total platinum demand.

The investment interest prompted ETF Securities to file with the U.S. Securities and Exchange Commission to start the first platinum and palladium trusts in the United States. The company, however, must overcome stiff opposition from industrial users and clear regulatory hurdles.

Rob Kurzatkowski, futures analyst at optionsXpress in Chicago, said that a U.S. platinum ETF would significantly boost investment demand as it would open the door to a much wider spectrum of investors.

“We have seen that the really explosive rally in gold happened to coincide with the launch of a gold ETF. We could possibly see the same type of phenomenon in platinum,” he said.

ETFs back each security issued with physical stocks of a given commodity. They are listed on stock exchanges and offer investors exposure in the underlying commodity without taking delivery.

Investors see a large upside potential for platinum, which traded at $1,150 an ounce on Friday, down 50 percent from its record high of $2,290 an ounce set last March. Palladium is down 60 percent from its record high. Meanwhile, gold already seen a rally and is down only 7 percent from its all-time peak.

Two major platinum ETFs in Europe, namely ETF Securities and Zurich Cantonal Bank, have seen significant investment inflows this year following a dismal second half in 2008 when prices plummeted as car production plunged amid a global recession.

The combined holdings of the two ETFs, however, represent less than 10 percent of annual platinum supply.


However, Kurzatkowski said that the platinum market was not liquid enough for funds and institutional investors to go full bore.

“It’s going to take something fundamental like a significant improvement in the auto sector to really drive platinum demand. At this point, the market is oversupplied for the foreseeable future,” he said.

U.S. auto sales are at their lowest levels since the early 1980s with no prospect of a short-term rebound. On the annualized basis tracked by analysts, sales are below 10 million vehicles compared with more than 16 million two years ago.

Platinum also faces a possible bankruptcy by General Motors Corp following rival Chrysler’s recent filing, market watchers said.

A proposal by U.S. President Barack Obama to regulate U.S. auto emissions in a bid to reduce climate warming greenhouse gases by 2016 lightens the outlook of platinum, driven by its ability to clean environmentally damaging fumes.

Brian Hicks, a portfolio manager with Texas-based U.S. Global Investors, which has over $2 billion assets, said that the proposal would be supportive to platinum demand for the longer term, but he cautioned the plan was still “a long way out.”

In a closely watched report released Monday, platinum refiner and specialist Johnson Matthey Plc said that platinum investment nearly doubled to 425,000 ounces last year.

Total demand, however, fell 5 percent to 6.35 million ounces, hurt by a sharp decline in auto industry buying -- the first drop since 1999, Johnson Matthey said.

“I do believe that the news is about as bad as it could get, and we are likely to move higher over the year, especially next year,” said James Steel, chief commodities analyst at HSBC in New York.