Analysis
The falling 20 DMA is exerting downward pressure on platinum. The 100 DMA has recently acted as support, suggesting the presence of strong buying on the dips around this level. We continue to believe that prices will manage to break higher once the 20 DMA is cleared.
Longer-term view: the monthly chart helps us understand why platinum has recently failed to continue higher. It was too weak to break above first strong resistance at its DTL from 2013 high, which resulted in strong selling pressure.
On the upside, platinum needs to move firmly back above its 20 DMA to shore up sentiment. On the downside, we will watch the 100 DMA, a break of which could push the metal lower still toward $1,000.
Macro drivers
Platinum has been under renewed selling pressure over the past three days after overreacting to the upside on positive macro forces (dollar weakness on lower Fed tightening expectation) and idiosyncratic ones (the impasse in South African wage negotiations).
AMCU, the largest union in the South African platinum industry, will meet with Amplats, Implats and Lonmin to try to resolve the deadlock. Negotiations are likely to last three to four weeks. Failure to broke a deal would result in a government mediation before a possible strike notice. Given the determination of unions and workers to fight for what they want, the probability of a prolonged strike is higher than the market is currently willing to admit. Speculative buying could follow, boosting prices.
Despite stronger-than-expected Chinese passenger vehicle sales, which rose 25 percent to 1.8 million units in August, according to the China Passenger Car Association, platinum continues to struggle.
Yesterday’s US employment data surprised on the upside, which in turn raised the probability of a Fed rate increase at the September 20-21
Speculative sentiment deteriorated markedly over August 23-30, essentially due to profit-taking, according to the latest CFTC statistics. But given the sharp run-up in prices since the start of the week, we would not be surprised by a re-engagement of speculative longs (see our latest PGM COTR).
ETF investors continue to liquidate, selling about 3,000 ounces or 0.2 percent of their holdings since September after liquidating 31,000 ounces (1.4 percent) in August and 37,000 ounces (2.9 percent) in July. Outflows could continue if risk-averse investors are tempted to take some profit to cut earlier losses (see our latest ETF daily report).
The demand outlook is mixed. On the one hand, autocatalyst demand, which accounts for 40 percent of total platinum demand, should remain robust given rising global growth in auto sales. But on the other, jewellery demand, especially in China, seems to be weakening further. Given the mixed demand outlook, platinum’s price direction will largely depend on supply developments, especially in South Africa, which accounts for 80 percent of global supply.
Recap of supply/demand balance:
The global platinum market was under-supplied by 275,000 ounces in the first quarter, according to the WPIC. Total platinum supply fell 210,000 ounces or 11 percent quarter-on-quarter, reflecting lower mining supply and a slight increase in recycling supply. Total platinum demand rose 180,000 ounces or 10 percent quarter-on-quarter to 2.01 million ounces, reflecting higher investment demand and automotive demand but lower jewellery and industrial demand. This suggests the supply/demand balance is tightening, which bodes well for the medium-term price outlook.
Conclusion
We maintain our positive view on platinum over the next 1-3 months. From a technical viewpoint, as was the case in June, the 100 DMA has acted as strong support and we expect it to continue to do so. From a fundamental perspective, we think the elevated risk of production disruptions in South Africa is not accurately priced in, suggesting that buying pressure could emerge in the near term. Finally, we expect the macro side to remain friendly for precious metals in September given our view that the Fed is unlikely to raise rates this month.
