Harrison Schwartz: Why PPLT Is My Top Platinum ETF Pick Through 2030

Key Concepts

• Platinum and Palladium as Portfolio Hedges: The discussion centers on platinum and palladium as alternative investments offering low correlations to traditional assets, providing hedges against monetary risk (like dollar devaluation) and inflation.
• Supply-Side Dynamics: The limited geographical concentration of platinum and palladium mining (primarily South Africa and Russia) and the significant market influence of single companies like Sibanye-Stillwater are highlighted as key supply-side factors.
• Demand Drivers: Demand for platinum and palladium is a mix of industrial uses and investment demand, with potential for future growth in areas like hydrogen fuel cells.
• ETF Investment (PPLT): The abrdn Physical Platinum Shares ETF (PPLT) is presented as a vehicle for gaining exposure to platinum.
• Long-Term Investment Thesis: The argument for investing in platinum and palladium is based on a long-term outlook, anticipating higher inflation and monetary volatility.
• Risk Assessment: Both bullish (supply disruptions, inflation) and bearish (strong USD, disinflationary policies) risks are considered.
• Portfolio Allocation: Recommendations for portfolio allocation to platinum are provided, emphasizing a cautious yet significant position.

Platinum and Palladium: An Undervalued Hedge

This episode of ETF Spotlight features Harrison Schwartz, a Seeking Alpha contributor, discussing the investment case for platinum and palladium, with a particular focus on the abrdn Physical Platinum Shares ETF (PPLT). Schwartz advocates for these metals as "all-weather" alternatives that can defend portfolios against various economic scenarios, offering low correlations and potential for alpha due to their under-the-radar status compared to gold.

The Case for Platinum and Palladium

Schwartz's interest in platinum and palladium stems from his broader investment philosophy of seeking alternatives that enhance portfolio robustness. He views platinum as a valuable hedge against monetary risk, similar to gold but with less market attention, which can lead to greater alpha potential.

Key Points:

• Low Correlation: Platinum and palladium offer low correlations with other assets, which helps reduce overall portfolio volatility.
• Monetary Risk Hedge: They act as hedges against dollar devaluation and inflation, similar to gold.
• Under-the-Radar Potential: Their less prominent status compared to gold allows for potential alpha generation as the market may not fully price them in.

Demand Drivers for Platinum and Palladium

Unlike gold, which benefits from significant central bank demand, platinum and palladium have a demand mix that includes both industrial and investment components.

Platinum Demand:

• Industrial Demand: Platinum has a higher proportion of industrial demand compared to silver, linking its performance to economic cycles.
• Investment Demand: As a precious metal, it also attracts investment demand, particularly during periods of inflation or economic uncertainty.
• Inflation Hedge: In an inflationary environment, all precious metals, including platinum, are expected to rise.

Palladium Demand:

• While not explicitly detailed in terms of specific industrial uses in this segment, it is mentioned that Sibanye-Stillwater's production cuts primarily affect palladium prices, implying significant industrial relevance.

Supply-Side Dynamics and Geographical Concentration

The supply of platinum and palladium is characterized by scarcity and geographical concentration, creating inherent risks and potential bullish catalysts.

Key Facts and Figures:

• Abundance: Platinum is approximately 30 times less abundant than gold.
• Production Volume: Annual production of platinum is significantly lower than gold.
• Primary Mining Location: The majority of platinum production originates from South Africa.
• Dominant Producer: Sibanye-Stillwater (ticker symbol SBSW) is a major player, accounting for roughly a quarter of global platinum and palladium production.
• Secondary Source: Russia is another significant source of these metals.

Supply Risks and Bullish Implications:

• Concentrated Production: Any disruption to the few mines that produce platinum and palladium can significantly impact supply.
• Company Production Cuts: Sibanye-Stillwater's decision to cut production due to lower prices is seen as a direct catalyst for potential shortages.
• Trade and Tariffs: Geopolitical risks, trade issues, or tariffs affecting South Africa or Russia could disrupt supply chains.
• Strategic Metals: Similar to rare earth metals, supply disruptions for platinum and palladium can lead to rapid price increases.

The ETF Investment: PPLT

The abrdn Physical Platinum Shares ETF (PPLT) is identified as a key investment vehicle for gaining exposure to platinum.

Key Details:

• ETF Name: abrdn Physical Platinum Shares ETF (PPLT).
• Underlying Asset: Physical platinum.

Long-Term Investment Conviction

Schwartz expresses strong, long-term conviction in platinum, extending his outlook to 2030. This conviction is rooted in his expectation of future economic conditions.

Arguments for Long-Term Investment:

• Anticipated Inflation: He foresees potential for higher inflation over the next decade due to government financing difficulties and dovish monetary policies (interest rate cuts).
• Increased Demand for Inflation Hedges: This inflationary environment is expected to drive higher demand for assets that serve as inflation hedges.
• Retail Investor Appeal: Platinum is considered a good pick for retail investors, distinct from central bank demand.

Historical Price Performance and Future Outlook

A comparison chart between gold and platinum prices reveals significant volatility in platinum, with a notable spike during the Global Financial Crisis (GFC) followed by a prolonged pullback.

Analysis of Price Trends:

• Past Volatility: Platinum experienced substantial price swings between the GFC and around 2011-2013.
• Recent Underperformance: Since its all-time highs, platinum has not surpassed those levels.
• Road to Parity: The path back to parity with gold is expected to be gradual due to shifts in industrial demand.

Factors Influencing Future Prices:

• Reduced Diesel Vehicle Demand: The rise of electric vehicles (EVs) and a decline in diesel vehicle demand have lowered short-term industrial demand for platinum.
• Emerging Industrial Demand: Growth in sectors like medical devices and hydrogen fuel cells is expected to stabilize industrial demand.
• Investment Demand Growth: The primary driver for future price appreciation is anticipated to be investment demand, contingent on continued monetary volatility.

Platinum as a Store of Value vs. Diversification

The discussion touches upon the role of platinum and palladium in a diversified portfolio, especially in the context of other perceived stores of value like Bitcoin.

Key Arguments:

• Consolidation of Value: In times of trouble, investors may consolidate their holdings into fewer, more trusted stores of value.
• Diversification Rationale: Schwartz argues against a single-asset approach, emphasizing that as long as demand exists and production costs rise with inflation, prices will likely increase.
• Cost of Production: The cost of producing platinum is closely aligned with its current price, suggesting limited downside risk.
• Hedging Increased Production Costs: The primary hedge is against rising costs of production, which is a natural consequence of inflation.

Risks and Opportunities

Both bullish and bearish risks are considered for the platinum and palladium markets.

Bullish Risks (Supply-Side):

• Trade and Production Disruptions: Risks associated with South Africa and Russia (tariffs, political instability) are seen as bullish for investors due to potential supply shortages.

Bearish Risks:

• Monetary Policy Shift: A strong defense of the U.S. dollar and aggressive disinflationary policies could moderate the upward trend in precious metals. However, Schwartz deems this unlikely.

Recent Price Performance of PPLT

The significant price increase in PPLT since late May/early June of the current year is attributed to several factors.

Catalysts for Recent Price Surge:

• Market Realization of Supply Shortage: Investors are increasingly recognizing both short-term and long-term supply constraints.
• Sibanye-Stillwater Production Cuts: Reductions in platinum and palladium output by Sibanye-Stillwater, driven by low prices (especially for palladium), are a primary driver.
• Mining Synergy: Since platinum and palladium are mined together, cuts in one impact the availability of the other.
• Investment Demand Growth: Following gold's surge, investors are seeking similar assets, making platinum an attractive option.

Portfolio Allocation Recommendations

Schwartz provides guidance on how investors should allocate their portfolios to platinum.

Recommendations:

• Low Downside Risk: The proximity of platinum's price to its cost of production suggests limited downside risk.
• Higher Portfolio Position Potential: This low risk profile could justify a larger allocation.
• Diversified Approach: He recommends diversifying across several metals.
• Largest Metal Position: Platinum is suggested as potentially the largest metal position within a diversified portfolio due to its perceived undervaluation.
• Suggested Allocation: A range of 5% to 15% is recommended, with no more than 15%.

Conclusion

Harrison Schwartz presents a compelling long-term investment case for platinum and palladium, driven by their roles as inflation hedges, their unique supply dynamics, and the potential for increased investment demand. The abrdn Physical Platinum Shares ETF (PPLT) is highlighted as a suitable vehicle for gaining exposure. While acknowledging risks, particularly on the supply side, Schwartz believes these metals are undervalued and poised for sustained growth, especially as investors seek alternatives to traditional assets in an increasingly volatile economic landscape.