Precious Metals update

Gold, silver and palladium traded quietly and without feature yesterday taking a back seat to the surge in platinum. Over the past few months we noted how the September sel-off in platinum had been accompanied by a tightening in platinum interest rates and that we suspected that this tightening would herald a recovery in platinum. This happened in early November with the metal trading more than $100 higher within a few days.

After a week or two of calm, platinum has again marched to the forefront, with buying seen in the spot and options market and borrowing noted in the forwards. The moves in the spot price are the most obvious, with platinum apparently trading as high as $1395/oz in Asia on Tuesday, according to Reuters, from a New York close of about $1260 on Monday and less than $1200 on Friday.

Forwards have tightened sharply too with one-month lease rates moving from about 4% on Friday to about 20% on Monday and substantially higher than that in Tuesday's Asian trading. It is impossible to forecast where platinum will head in the short term as tightness could drive the spot price higher still - or alternatively we may have seen the highs in today's Asian trade.

But on a longer term view we know that these events are normally short-lived and when liquidity returns to the forward market, the price will probably fall: certainly there will be little buying from price-sensitive Chinese consumers with spot and funding costs so high. Indeed we believe the longer-term prospects for platinum demand have been damaged by this move.

It will accelerate substitution efforts from industrial users of the metal and with Chinese jewellers unable or unwilling to buy platinum ahead of Chinese New Year, it will prompt a switch to other precious metals - white gold, yellow gold and palladium. One thing is certain, however: volatility and illiquidity is set to continue in the short term.