Investment News & Review

Real Time Precious Metals Quote Charts

Market commentary:

More banks jump on the ETF bandwagon

Platinum and palladium prices hit five- and eleven-month highs respectively in April as previously rumored ETF plans crystallized. While the up-trend in platinum is still intact, the market must break above the old high in order to attract new buyers. Net non-commercial long contracts for palladium reached an all-time high at the end of the month; investor interest will be key to maintaining prices.

While the US dollar gold price has been on an upward trend this year and looks as if it is building to challenge previous highs, the price in euro terms has been more stable. Demand from investors recently appears to have been moderate rather than spectacular while central bank selling seems temporarily to have increased. In contrast, jewellery demand appears to have been strong.

Trendline support for silver is at $13.25/oz, but there are sufficient causes for concern based on indicators of investor psychology to be cautious. Short sellers have been entering the market in anticipation of lower prices.

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Focus: fuel cell technology

Auto companies continue to invest vast sums in advancing fuel cell technology in response to the pressures they face over increasingly stringent and widespread vehicle emissions legislation. Here we give an overview of the role that platinum plays in fuel cell technology, looking at the potential demand for platinum in fuel cell vehicles and their current status with regards to full commercialization.

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Gold – diverging euro and dollar prices 

The dollar gold price remained on an upward trend through most of April.  Although it experienced another downward correction in the final week of the month it still looks to be in a firm upward trend with many analysts expecting a confirmed breach of the $700/oz level during the course of this year. 

Technically the price looks as if it is moving in an orderly fashion towards resistance at the old high of $725/oz reached one year ago.  The RSI (relative strength index) is currently at 60, suggesting that there are still a number of uncommitted buyers available to the market.  Unless, and until, a “double-top” formation develops, the upward trend looks firmly supported in the short-term. 

While market attention focuses on the dollar price, it is important to look at other currencies, notably the euro price, since the strength or weakness of the US dollar can drive the dollar price up or down irrespective of more fundamental factors.  From May 2005 until well into the second half of 2006 movements in the dollar and the euro price were very similar.  But, as the chart shows, the last six months have seen a divergence; day to day fluctuations in the euro series have largely mirrored those in the dollar, but the underlying trend has been weaker – indeed almost flat.  We believe this indicates underlying fundamental supply and demand pressures have been broadly balanced.

Jewellery demand mopping up additional supply

We attribute the weaker trend in the euro price to two factors, both of which we consider temporary: that investment demand, while sustained, is not currently as dynamic as it has been; and recent additional central bank sales.  The two main timely indicators of investment demand are net inflows into Exchange Traded Funds (ETFs) and the Commitment of Traders reports from Comex.  Latest data for the latter indicate a substantial net long position but below earlier peaks.  Net inflows to major ETFs during the first four months of 2007 were just 44t compared with 136t in the same period of 2006.

Net central bank selling, which had been very low in the last half of 2006, has increased recently.  The May issue of the IMF’s International Financial Statistics showed a surprise 23t sale by Indonesia – a country which had held its gold reserves broadly stable since 1981 – in February. In addition the weekly Eurosytem balance sheet published by the European Central Bank has shown that Eurosystem sales between 9 March and 27April totalled around 88t, compared to around 20 tonnes in the previous seven weeks. Spain accounted for 40t of this in March and it seems a fair assumption that it will also have accounted for the bulk of April sales with France, which sells a small amount of gold each week, accounting for the remainder.

We consider these factors temporary and probably offset by strong jewellery sales.  In India the key festival of Akshaya Thrithiya on 19/20 April generated very substantial buying – the World Gold Council is reported as estimating demand during the festival at 50 to 60t compared with 35t last year.  Anecdotal reports also speak of good demand levels in China and in the Middle East with customers having adapted to the higher prices.  We expect demand to remain strong for the next few weeks (assuming prices do not become excessively volatile) before fading during the Northern hemisphere summer and the Indian monsoon. During this period we expect prices to remain firm but broadly stable in euro terms but to rise in dollar terms due to further projected weakening of the US dollar.

Silver – are rising stocks finally inducing nervousness?

Reported stocks of silver have increased during the last month. This is not new.  After all, our tabulations suggest that the market has been in surplus since 2004–2005.  And reported stocks have generally been increasing since that time.  Of course, reported stocks have increased since then by more than the cumulative surplus, and this suggests a transfer of stock from private dealer and government (official) holdings to the transparent depositories of Comex and iShares Silver Trust.  We estimate that mine and scrap supplies exceeded consumption by approximately 3,000t in 2005–2006.  And we forecast that the surplus will be this large for this year alone.  Comex and iShares holdings increased by 4,000t in 2005–2006.  This is roughly equivalent to the quantity of silver estimated to have been sold by governments, including 1,900t from the Indian government.  Some quick sums therefore point to a rise in private dealer stocks in 2005–2006.  This year’s forecast surplus is certainly showing up in some stock numbers.  A total of 1,059t of silver has been added to Comex and iShares holdings since the beginning of this year, of which 632t is with Comex.

The realisation that perhaps silver’s basic fundamentals are weakening (markets for metals such as copper and zinc are not yet easing with any conviction) may now be occurring.  Investors seem to be more wary, particularly as they are seeing details of a silver-bearing mine being commissioned almost every weak at the moment.  And our technical analysis (see below) appears to suggest so too.

Technical picture indicates nerves

The short-term chart indicates some investor tension. Prices fell back from the high and volumes spiked, and this shows that short sellers were entering the market in anticipation of lower prices.  The RSI supports this view by registering a reading below 50. 

Open interest has also dropped dramatically as long positions have been closed.  To add to the mildly pessimistic outlook, the market formed a gap by opening lower than the previous day’s low.  This is usually a cause for concern.  The last time a gap appeared was in early March and the price subsequently fell from an opening $13.35 to a low of $12.50, having closed the previous day at $13.62.  Overall, these indicators would point to more bearish sentiment than the chart on its own would suggest.  There is trendline support at $13.25 and a further support level at $12.65, but there are now sufficient causes for concern based on indicators of investor psychology to be cautious.  Buyers may well decide to wait on the sidelines until good quality support is reached before entering the market.

The long-term chart may well be in the throes of a topping formation, indicating that a major reversal is on the cards.  A break above $15.20 on a closing basis would dispel these fears but, until this is achieved, the market looks vulnerable.  Trendline support is at $13.00, although a break below here as far as $12.00 would be permissible and leave the up-trend intact.  This is a difficult chart to read; the volatility generates a great deal of noise while obscuring trend signals.  However, it is clear that any move is likely to be fairly extensive and since the market failed to move above the previous high at $15.20, the odds would favour a robust retreat from the next high, rather than a major bounce from the next support.

PGMs – Exchange-traded Fun(ds)

Platinum and palladium prices hit five- and eleven-month highs respectively in April as previously rumoured ETF plans crystallised.  Zurich Cantonal Bank (ZKB) announced on 13 April that it is planning to launch ETFs in platinum and palladium, to be listed on the Swiss Exchange on 10 May. ETF Securities subsequently revealed that it was launching separate ETFs in the same metals, in addition to a precious metals basket comprising 20% platinum and 12% palladium (42% gold, 26% silver). Trading began on 24 April through the London Stock Exchange, taking platinum to $1,321/oz and palladium to $381/oz.  Prices came off slightly towards the end of the month on news that Norilsk had secured export quotas for platinum and rhodium through 2008, and that Lonmin’s No.1 furnace would be operational again by May.

With the platinum market delicately balanced this year, the introduction of ETFs is inherently bullish for prices given the size of the market and above ground stocks.  ZKB and ETF Securities have approximately 70koz and 77koz of physical platinum stored to back their funds.  The latter expects to attract about $100M within the first year (equivalent to 80–100koz) for its platinum products, whereas potential demand for the ZKB platinum fund could be limited in comparison given that a minimum investment of about $40,000 (at current market prices) is required.

Anglo Platinum and Impala have indicated that they will not deliver into ETFs on the basis that the majority of their production is accounted for through long-term offtake agreements and that such schemes would put upside pressure on the platinum price by reducing liquidity in an already tight market – especially if other banks are encouraged to introduce similar financial instruments.  Indeed, as this Monitor goes to press, speculation about the launch of a third platinum ETF (this time by a major USA bank) is circulating.  Therefore, while the European-based funds may not involve huge amounts of metal, collectively these ETFs will surely have a material impact on the platinum market.

In all probability, ETFs will derive physical metal at the expense of the jewellery sector, which accounted for almost a quarter of total platinum demand last year. In the longer-term, however, there is a risk of substitution by some industrial consumers should the funds attract significant interest at this stage in the runaway commodity bull-run.

Large above ground inventories of palladium will buffer the impact of ETFs in the physical market, but implications for the price are still very positive.  In reaction to the announcements, the net non­commercial long position on Nymex increased by 63% in the past month alone to stand at 10,281 contracts (33.7t)

– an all-time record high – on 24 April.  CRU believes that investor interest will be key to maintaining palladium prices and the adoption of a buy-and-hold mentality, as seen with gold ETFs, could be a long-term supportive factor.  ZKB expects demand to amount to about 200koz of palladium in the first year.

Technicals point to the upside

The short-term technical chart indicates that the up-trend in platinum is still intact – the recent failure to move above $1,322/oz was not an indicator that the bull trend is over.  The longer-term chart looks more precarious with the real possibility that a textbook double top may be forming. The market must break above the old high, on a convincing closing basis, if it wishes to attract new buyers.  Warning bells would ring at $1,200/oz – a break below would signal a major trend reversal.

Open interest indicates that even at relatively high levels, new buyers are entering the palladium market.  The price action in April was more volatile than in recent months and this may cause buyers some concern. Overall, the broad technical indicators would support a continuation of the up-trend, though the signals are lukewarm.  

Focus:

Fuel cell technology in automotive applications – implications for platinum demand

Auto companies continue to invest vast sums in advancing fuel cell technology in response to the pressures they face over increasingly stringent and widespread vehicle emissions legislation. Here we give an overview of the role that platinum plays in fuel cell technology, looking at the potential demand for platinum in fuel cell vehicles and their current status with regards to full commercialization.

Principle

A fuel cell is a device in which electrical power is generated through the interaction of hydrogen fuel (oxidised at the anode) and oxygen (reduced at the cathode) around an electrolyte core.  This current is used to power an external circuit. A catalyst accelerates the reactions at the electrodes, and the particular catalyst used will depend on the type of fuel cell required.

There are five principal types of fuel cell – alkali, phosphoric acid, proton exchange membrane, molten carbonate and solid oxide.  Solid oxide and molten carbonate fuel cells more often comprise zirconium/calcium oxides or nickel in place of a platinum catalyst.  Electrical efficiency at operating temperatures within the 80–100°C range is necessary for use in mobile applications; this is achieved best with platinum.  

The proton exchange or polymer electrolyte membrane (PEM) fuel cell consists of a polymer membrane coated on both sides with a platinum catalyst.  This arrangement provides high power density at low temperatures (c.80°C) and is capable of meeting shifts in power demand, such as that required for vehicle start-ups.  PEM fuel cells are therefore regarded as the prime candidate for use in electric vehicles (cars and buses).  The FCV models listed in the table below all use PEM fuel cells – with the possible exception of Ford’s Airstream model, for which full details are not yet available.  Alkali cells are less suitable for automotive applications as power density is about 10 times lower than that of a PEM cell, while phosphoric acid cells operate at much higher temperatures, and therefore require longer to warm-up.

FCV potential

Auto companies continue to invest vast sums in advancing fuel cell technology in response to the pressures they face over increasingly stringent and widespread vehicle emissions legislation.  FCVs are essentially zero emissions vehicles in that the only waste product emitted is water; therefore fuel cell technology is viewed as a long-term solution with regards to the problem of automotive pollution.  

The use of hydrogen fuel provides further incentive for commercialisation of automotive fuel cells given the high oil price, and provides a means of reducing dependence on imported oil for many countries.  Hydrogen fuel is produced through steam methane reforming (already a fully commercial process and thought to be the most cost-effective), biomass gasification/pyrolysis and electrolysis.  In February, catalyst developer Acta unveiled an onboard electrolyser catalyst that produces hydrogen from ammonia (one of the most widely used and transported chemicals in the world), thus providing a possible solution to one of the major barriers for FCVs – that of hydrogen storage (see below).  In terms of vehicle performance, the internal combustion engine is only half as efficient (at best) as an FCV for vehicle propulsion, yet the life-cycle cost of an FCV will likely be less than, or competitive with, that of a conventional petrol vehicle.  

Barriers to fuel cell technology

Since a single fuel cell typically produces between 0.7– 0.9 volts, cells are layered in a ‘stack’ to generate higher voltage. Fuel cell stacks usually comprise more than 45 units and contain in the region of 60g (can be up to 100g) of platinum – this is some 40 times greater than the quantity of PGM used in an autocatalyst. Platinum contributes much of the cost of a PEM fuel cell and the current industry target is to achieve a loading of 12 to 15g per 70kW vehicle. While reducing platinum loadings will lower manufacturing costs, there is generally a corresponding negative impact on power generation.  However, some encouraging results have emerged in this area of research.  In the January 2007 edition of Platinum Metals Review, the use of ink-jet printing in the application of catalyst to the membrane electrode assembly (MEA) reportedly allowed for a sufficient reduction in platinum loadings.  Also, Ballard Power Systems, one of the world’s leading developers of PEMs, has found the use of carbon silk to be effective in maintaining performance while reducing platinum requirements by as much as 30%.

Further technological issues relate to the fact that the platinum catalyst can degrade (via dissolution, re-deposition or agglomeration) when the fuel cell is in use, and that driving ranges are limited due to the difficulty in preventing hydrogen leakage from the storage tank.

Also of critical importance is the need for synchronous development of fuel supply infrastructure and FCV commercialisation. Auto manufacturers will not mass produce FCVs in the absence of a sufficient network of hydrogen fuelling stations, yet governments/companies are unlikely to invest in such an infrastructure with few FCVs on the road. General Motors commented in April that, by its own calculation, in the USA just 12,000 fuel stations would be required to service 70% of the population on the basis that, in major cities, no-one is more than two miles from a station and stations are located every 25 miles along motorways.  Fuel Cells2000 estimates that there are currently 147 operational hydrogen stations worldwide (a further 64 are planned), but only about 5% of these are available for public vehicle refueling.

Regional developments

A number of European countries are aiming to establish a ‘Joint Technology Initiative’, comprising 45 organisations in total, in order to further promote the development of fuel cell and hydrogen technology. The EU has strongly supported fuel cell research; last year Europe was second only to the USA in terms of the number of FCVs developed.  Furthermore, following on from the successful introduction of a small fleet of fuel cell buses – as part of the HyFLEET Clean Urban Transport for Europe (CUTE) programme – a second fleet is to be introduced in Hamburg and Amsterdam this year and next.  Similar programmes have also been launched in Beijing, Perth and Santa Clara (California).

The Japanese Ministry of Economy, Trade and Industry aims to have 50,000 FCVs in use by 2010, increasing to 5M vehicles by 2020.  The Nissan Research Centre says that reducing carbon dioxide emissions is a key driver behind its FCV development efforts.  In China, approximately $1.9B is to be invested in the development of alternative energy vehicles over the next three years.

When can we expect FCV commercialisation?

FCV technology is still in the pre-commercial phase of development and research efforts are being directed at increasing fuel cell durability and performance to make it price competitive with batteries and, eventually, the internal combustion engine.  Consensus at the recent Fuel Cell Expo in Tokyo was that infrastructure costs for FCVs would be a major hurdle standing in the way of full commercialisation for many years yet.  Furthermore, at current low production volumes, automotive fuel cell systems cost about eight times that of an internal combustion engine on a per kW basis, putting the total cost of an FCV anywhere between $500,000 and $1M.  This price tag is unlikely to attract significant market share away from conventional vehicles, therefore we don’t expect FCVs to become a major global industry before 2020 at the earliest.  However, auto manufacturers could begin rolling out FCVs to dealerships much sooner, including Honda from 2009–2010 and General Motors from 2010–2015.