Last week ended with platinum losing significant ground, and traders were beginning to think it would drop back to the $2,000 level. However, the recent cooling of oil prices on international markets eased the pressure on metal prices and platinum exhibited some recovery as this week started.
Precious metals had been under intense pressure triggered by a confluence of three headwinds. The first was a firm dollar. When the USD appreciates, there is an inverse impact on precious metals because buyers who use other currencies now find it more expensive to acquire gold, silver and platinum priced in U.S. dollars.
The second headwind was the rising price of oil. Oil climbed above $100 per barrel on international markets due to the supply disruptions caused by the conflict in Iran. Rising oil prices stoked fears that inflation would spike and this would, in turn, delay interest reductions by the Fed. When benchmark lending rates are elevated, precious metal prices come under pressure because investors opt to channel their money into assets that yield returns instead of putting their money in non-yielding assets like platinum.
The other headwind that rounded off the trio of headwinds was the firmer yields on U.S. Treasuries. Again, precious metal prices often retreat when yields are high because investors prefer to put their money in asset classes like Treasuries that give them a return on their investment. When yields are higher in real terms, precious metals lose some of their allure since they don’t offer any returns.
The start of this week therefore brought needed relief to platinum prices as yields softened, the dollar strength eased and oil prices retreated. This helped platinum prices to climb to $2,109 per ounce as the week’s trading got underway, and this has raised optimism that the precious metal could climb higher if conditions remain as they are at the moment.
All eyes are now focused on whether the metal holds firm above the $2,100 level or retracts toward $2,000. The structural supply deficit that is expected to remain throughout this year is helping to support expectations of further gains in the price of the metal.
However, the trajectory can change on a dime if any macro factor changes significantly, such as when oil markets are further rattled by strikes on export hubs or major oilfields in the Gulf. A lot also hinges on whether the Strait of Hormuz will reopen to international shipping. Trump is trying to build a coalition of countries to send naval resources to escort ships through this major chokepoint.
If this effort succeeds, a degree of normalcy could return to international supply chains, though the situation remains fragile given that Iran is threatening to strike any vessel attempting to move through Hormuz if it is linked to the U.S. and its allies.
The current supply deficit is expected to support platinum prices and any selloff triggered by geopolitical or macroeconomic events is unlikely to be sustained since the fundamentals of limited platinum supply will eventually prevail and cause prices to recover. Major platinum producers like Platinum Group Metals Ltd. (NYSE American: PLG) (TSX: PTM) are counting on this shortfall in their revenue projections for the year.
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