Platinum Exchange Traded Funds

Investing in platinum or other precious metals directly, in other words being in possession of it to be sold later, does appeal to many investors. They may feel more secure in having the platinum under their physical control versus seeing it in the hands of others, which may involve varying perceptions of insecurity.

The perceived security of owning platinum is certainly a legitimate goal of owning it, or at least can be if one is concerned enough about this to give up the liquidity that is involved, since physical platinum cannot normally be bought and sold as readily or as efficiently as other means of speculating on platinum which do not involve the physical transfer of the platinum itself.

Platinum Exchange Traded FundsMuch of the platinum trading as far as speculation goes in it does not ever involve platinum changing hands, the overwhelming percentage of it actually. One can speculate on platinum without any intention of oneself or one’s agents ever possessing it, for instance with positions in the futures market or with platinum exchange traded notes, which are funds based upon platinum futures.

If we look at owning platinum on a scale from the least efficient to the most, buying and taking delivery of physical platinum would be the least efficient, followed by buying allocated platinum held by third parties, buying shares of platinum pools through exchange traded funds, and finally by taking positions in platinum futures or with contracts for difference.

The efficiency here can be understood as the impact of transaction costs upon the trade, where buying platinum bars and coins would have the highest transaction costs by far. Buying allocated platinum reduces these costs by not requiring the platinum to be delivered to the buyer.

Exchange traded funds take this a step further by not only not delivering the physical platinum but leveraging the buying power of a great deal of investors.

Platinum futures generally do not involve any platinum changing hands at all, and contracts for difference never do, and with contracts for difference, the order for platinum may not even be sent to the market as the position may simply be covered by the broker.

Many investors do prefer that their investment represent a certain amount of platinum, held somewhere, rather than just a position on paper whose value moves with the platinum market generally, and also want to achieve efficiency, and platinum exchange traded funds, or platinum ETFs, provide the opportunity to achieve both goals.

ETFs Effectively Manage Transaction Costs

If you are looking to buy platinum on your own, there will be significant transaction costs involved, at least significant ones compared to other means of owning or controlling a position that looks to mirror the trading price of platinum in the market.

When we view the price of platinum or other precious metals in the market, we are looking at what it costs to transact huge amounts of it, well beyond the means of virtually all platinum investors. Order size means everything here, and smaller orders, the kind that institutional investors place, are going to cost a lot more for a round turn trade than huge ones will.

If you are buying from a dealer, you will have to cover the dealer’s costs, in a retail setting, which involves a significant markup. Let’s say you buy an ounce of platinum and the spread on the spot market is $5 per ounce, meaning that if you bought an ounce of it and sold it right back it would cost you $5 to do it.

When you buy from the dealer, the platinum has changed hands several times by the time you get it, the dealer marks it up, the wholesaler that they bought it for marks it up as well, and instead of the spread being $5, it typically is over $100 now.

This $100 gets tacked on to the bid price of the market, and is sunk costs, there’s no way to make up for it no matter how much the value of the investment goes up. You will always have paid an extra $100 over what the platinum could have been bought for on the market, and this will affect your net position by exactly that amount, reducing your profits on the trade or adding to your losses by $100.

If you’re looking to buy a few ounces of platinum though, and want to actually own the platinum, you won’t be able to achieve this yourself, you will have to get it through a retail dealer. Up until recently the difference between retail platinum costs and the market has merely been a theoretical one for retail investors, with spreads like what the market offers being completely unattainable, but that has now changed.

Wouldn’t it be nice to be able to buy it a lot cheaper and reduce this spread to better approximate the spot market for platinum?  You can’t do this trading in the amounts that individual investors do, because the size of your orders are too small.

However, if you team up with other investors, where the amount of total funds you have to invest in platinum goes from the thousands of dollars to the millions, now you have the financial leverage to buy and sell your platinum more efficiently, and reduce the spread and ultimately the trading costs in turn.

This is the idea behind platinum ETFs, and given that this does provide much better spreads than can be achieved by placing individual orders for it, this is one of the reasons why platinum ETFs as well as ETFs based upon other precious metals such as gold and silver have taken off so much in recent years.

Provided that one does not mind the fund holding the platinum for them, in which the shares that they own represent a fractional ownership of a platinum pool rather than a specific allocation in their possession and control, then platinum ETFs can be a great way to speculate on platinum.

The Greater Liquidity of Platinum ETFs

The ability to get a lot better prices for platinum transactions is only one benefit of platinum ETFs over owning platinum oneself. The ability to trade ETFs in real time on exchanges is another significant benefit.

There are two main benefits to this actually, which are the timeliness of the trades and the convenience involved.

The entire trade with a platinum ETF occurs in a matter of seconds, where an order to buy or sell a certain number of shares can get filled by the market at the speed of light. Contrast this with ordering a certain number of platinum coins or bars, where the order must be placed with the dealer, it has to be filled, it has to be shipped to you, and you may also need to travel to a location to pick up the shipment or otherwise arrange to be available to take the delivery.

It is therefore much more convenient to just buy shares online with a click of a mouse than go through the process of taking physical delivery of the platinum, and to many platinum investors, this represents the ultimate in convenience with trading platinum. You can’t get more convenient than this in fact, and the only thing you have to really worry about is when the market is open, as ETFs trade during normal market hours, as opposed to futures and contracts for difference which offer broader trading hours and are only closed on weekends.

With the position fully entered immediately, you can also place a trade to close your position as soon as your initial order is filled. If you change your mind an hour or a day after you buy it, you can close it in seconds as well, where if you bought physical platinum your delivery would not have even arrived yet, and you have to get the order to send it back of course.

ETFs offer the ability to control real positions in platinum with the efficiency of paper trading, or taking positions which are purely economic based upon the changing prices of the underlying asset. This is what happens in derivatives trading, although ETFs aren’t derivatives, they involve actually owning platinum, which appeals to many investors, perhaps viewing this as the best of both worlds is platinum ownership is important to them.

ETFs Allow You To Speculate on Platinum Price Decreases As Well

When you buy platinum, the buy indicates that you are long the asset, meaning that the value of your investment will rise as the price of platinum increases, and decline as it decreases.

This used to be the only way you could speculate on platinum at one time, but nowadays, you can place bets on it either going up or going down, by selling short shares of ETFs or by buying what are called inverse ETFs, where the fund itself is short platinum.

Instead of buying platinum, you can sell it first and look to buy it later to cover your position. If you short platinum yourself, you are borrowing the shares from brokers with the promise to return them later.

If platinum is selling at $1000 an ounce for instance and you sell an ounce worth, and the price drops to $900, and you buy to cover the short sale, it is as if you bought it at $900 and sold it at $1000, even though you took the reverse route to this.

The price of platinum is pretty volatile to both the upside and the downside, and there’s nothing that says that people who wish to speculate on platinum need to limit themselves to speculating on price increases, as they now can speculate on price decreases as well and look to profit from that as well if they wish.

No matter if one is a very short term investor or one that intends to hold their positions in platinum for years, it can benefit investors to time the market, and not timing it is a terrible idea when trading platinum in all cases. Without timing, one places their trust not in skill but in the vagaries of the market, where their trades will travel wherever the winds blow rather than having someone control the ship so to speak.

The winds blow significantly in both directions with platinum in particular and this is not an investment that tends to accrue a lot of value over time like stocks do, which is the case with other precious metal investments. Investing in platinum particularly benefits from active management, and while one can exit the platinum market when its outlook from the long side diminishes, the most efficient way to manage is is to look to speculate on both sides, taking advantage of both bull and bear markets and moves in platinum.

Overall, platinum ETFs take investing in platinum to a whole new level, and boast some of the lowest management fees in the financial services industry, as low as 0.6% per year. Given the additional flexibility and much lower transaction costs versus buying platinum on your own, platinum ETFs will very likely only keep growing in popularity as more and more investors become better acquainted with their benefits.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: [email protected]

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