Large Upward Price Movement in Platinum Ahead

Source: Seeking Alpha, Avery Goodman (7/18/11)

"Short sellers would like to hide platinum's shortage from the rest of the market."

Seeking Alpha, Avery Goodman

For the past week or two, the price of platinum at the NYMEX futures exchange has gone into repeated transient episodes of backwardation. As this author has explained in past articles, backwardation in a precious metal usually means that a shortage exists in the marketplace, and hidden momentum is building for a very strong upward movement.

Platinum for July delivery is being offered at a higher "ask" price than platinum offered for the next major delivery month, which is October.

What caused this pricing anomaly to continue for so long? Buyers of precious metals futures contracts, who are targeting off-month delivery periods, such as next August, are unconcerned with low liquidity. That is because they almost always intend to take physical delivery. Short sellers know this. They hesitated for a very long time, up to the point where a failure to accept the bids would have alerted the broader market to a problem they may want to keep secret.

Given that the mining supply of platinum is only 1/15th that of gold, and that very little above-ground supply exists, jewelry market substitution is probably creating a shortage that short sellers would like to hide from the rest of the market. When the price rises enough, they can justify the opening of a lot of new, potentially profitable short positions. With platinum only $170 per ounce higher than gold, and with the ratio in normal times being 2-2.5 to 1 against gold, it is likely to appreciate more quickly.

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