Platinum Spread Betting
Platinum is one of the precious metals that you are able to spread bet on, and the number that you are quoted is the price in US dollars for one ounce of the metal. The current quote for a platinum spread from IG Index is 1525.9 – 1527.9, and this is for a futures style bet expiring next month. As it is a futures style bet, there is no interest given or received overnight while the bet is open.
If you believe that platinum is going to go up in the next few weeks, or even that the US dollar is going to sink, which amounts to a similar thing, then you may want to take a long position, and place a buy bet for £6.50 per point on platinum at 1527.9. Just six months ago, platinum was above 1800 so you can see that it has been fairly volatile. Say on this occasion the price goes up to 1638.2 – 1640.2, and you decide to close your bet and take your winnings.
Platinum is very important for the auto industry, with 50% of demand originating from catalytic converters for cars and commercial vehicles.
When you close a long spread bet it is at the lower price, so this closes at 1638.2. To work out how much you have won, you simply have to figure out the number of points that you have gained. 1638.2-1527.9 is 110.3 points. Your bet was placed at £6.50 per point, so the total you have won is £716.95.
Always when you are spread betting, or for that matter doing any sort of trading, you need to have an idea how much you can lose if the trade goes against you, and balance this against the potential gain. This is the only way that you will learn to make a profit from trading. Assume that instead of increasing, platinum dropped further to a value of 1486.4 – 1488.4, and at this level you decided to cut your losses and close the bet. Once again, we use the lower or selling price when closing a long bet, so the value is 1486.4.
This time the calculation is not so pleasant, but still as easy. The number of points that you lost on your bet is 1527.9 less 1486.4, which is 41.5 points. The stake was £6.50 per point, so multiplying that out we find that the total loss is £269.75.
You will have noticed that with IG Index for this bet the spread is two points. For simplicity it is assumed the same at both ends of the bet, although it might well change with a futures style bet as the time starts running out. To see how the spread betting company makes money, we can simply work out how much you would have made on that last bet, if you had taken out a short bet instead.
At the outset you would have taken a short bet at 1525.9 for £6.50 per point. The bet would have closed at 1488.4. This means that you would have gained 1525.9 less 1488.4, which is 37.5 points. Multiplying that times the stake, your winnings would have been £243.75, which you can compare to the amount of £269.75 that you would have lost if you had placed your bet in the wrong direction.
Investing in Platinum
There are several ways of acquiring exposure to the platinum price besides of course spread bets and CFD contracts on the price of the metal:
- Futures traded on the London Platinum and Palladium Market or on NYMEX in New York
- Acquiring the metal in a physical sense, like buying coins such as the American Eagle, or in deposits in a Swiss bank account.
- Buying stock in mining companies with sizable platinum assets or exposure like Anglo American Platinum, Anglo American (AAL), Impala Platinum (IPLA), AIM-listed Jubilee Platinum (JLP), Lonmin (LMI) and Northam Platinum.
- Owning ETFs based around the platinum price like ETFS Physical Platinum (PHPT).
- Traded options in platinum and palladium, only available in the USA markets.
Of course futures and options are too complex for beginners. The minimum future contract for platinum is 50 ounces which is a lot when you take into perspective that prices could fluctuate $100 in a day, or $5,000 per contract. Physical ownership is also likely to be costly as this will incur VAT, insurance and security costs. The metal itself can also be traded via an ETF in London, ETFS Physical Platinum (PHPT) with each share giving entitlement to about a tenth of an ounce of the metal held in bars at a custodian bank.
Although platinum is even rarer than gold, it is presently trading at around $150 per ounce less than the yellow metal, the biggest discount in 26 years – December 2011.
How to Spread Bet Platinum
Platinum is the most well-known of six platinum group metals – platinum, palladium, rhodium, ruthenium, osmium, and iridium. Of these precious metals, it is likely that your spread betting provider will offer you prices on platinum and palladium – since iridium, osmium, rhodium and ruthenium are mainly niche products traded only by industrial specialists. In reality they are all precious metals, having uses as catalysts and are corrosion resistant.
South Africa is the major producer of platinum – around 75% of platinum are mined in South Africa, and most of its output goes towards automobile components, specifically catalytic converters to help reduce exhaust emissions and for the production of electronics. But the rest of the platinum produced goes towards jewellery, and this is where you are most likely to have seen it.
Platinum itself is one of the world’s scarcest metals – in fact it is about 15-20 times scarcer than gold. They say that mine production is only about 5,000,000 ounces per year, as compared to 82,000,000 ounces of gold. However, as a catalyst only small quantities are needed in order to facilitate the required chemical reactions. A true catalyst does not get consumed in the reactions, and so does not need replenishing.
Unlike gold for which the standard contract is 100 ounces, platinum is traded on the futures market in 50 ounce lots. The price of platinum per ounce is nearly the same as gold, and the price you will see quoted from your spread trading company is in US dollars per ounce, currently around $1500. This is quite a discrepancy in price because a ratio of 2:1 between platinum and gold has commonly been considered normal. Just 5 years ago, for instance, gold was trading at $600 an ounce while platinum was trading at $1,200. The factors that have driven the gold price to record price levels – in particular the banking and credit crisis and troubles surrounding sovereign debt bond issues have negatively impacted the price of platinum. Investors who are upbeat about the eurozone could take a position betting that the spread between gold and platinum will narrow back closer to historical levels.
As you can imagine, because of the small quantities involved the price of platinum is fairly volatile. Add to this the fact that there is probably less than a year’s supply of platinum above ground, unlike other precious metals like gold, and you can see there is a great sensitivity in the market. South Africa is also prone to labour unrest and power supply problems, and these factors also add to the volatility. In fact, fairly recent labour strikes in South Africa have disrupted supplies at some the world’s biggest mining operations with the consequence that the platinum market has switched from one that was in surplus mode to one which will remain in short supply for a number of years.
The platinum mining industry not only has to deal with ongoing strike threats but also with rising costs and safety issues. As such the rise in energy and salary costs are likely to push South Africa’s breakeven level for platinum extraction higher in the next few years and if platinum prices stagnate or fall below the costs of production, it is likely that this will lead to further industrial strikes and/or mine shutdowns. The current price breakeven levels is around $1,400/oz taking into account operating costs and $1,650/oz accounting for all costs.
Platinum is mainly an industrial metal these days and reliant on motor industry demand in particular the auto sector. Its price is also affected by the USA economy, particularly as it is priced in dollars. But there are also seasonal reasons as to why the price fluctuates. These reasons can be divided between the automotive ones and the jewellery or decorative ones.
The US market introduces the following year models of cars in August, so there is a slackening of demand in August and September following the rush to create the new models. Platinum’s cousin, palladium, tends to be used more for exhaust catalytic converters, which slightly reduces the demand. Industrial production tends to be stronger during the months of February and March, pushing up the demand. Demand for platinum as jewellery strengthens in the summer to satisfy the demand in India for its festivals, and is strong again towards the end of the year, presumably for Christmas shopping.
When you study the platinum price charts you will see that it is prone to gaps at times, and this may make you want to consider using guaranteed stop loss orders, even though they typically require a larger spread in price. Without a guaranteed stop loss, an ordinary stop loss order merely becomes a market order to close your position once the level is passed, and no matter how diligently you follow the prices, if you cannot anticipate a gap then there is no way to close the bet with the price within bounds.
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