UBS advised clients on Thursday that it currently prefers gold over platinum heading into the fourth quarter, highlighting a deterioration in platinum's supply-demand backdrop after the white metal recorded a second consecutive quarterly surplus.
According to UBS strategist Giovanni Staunovo, the platinum market remained oversupplied in the second quarter. "Weak investment and jewelry demand suggests that the platinum market will remain oversupplied this year," he wrote. "Given platinum's weaker fundamentals, we currently prefer exposure to gold over the white metal."
The World Platinum Investment Council estimated a second-quarter surplus of 244,000 ounces, which it said equates to roughly 15% of global demand. The council also revised its first-quarter surplus higher to 304,000 ounces. For the full year, it now projects a surplus of 265,000 ounces, a marked reversal from an earlier forecast of a deficit, driven primarily by weaker investment demand.
Staunovo attributed the recent surplus to several supply- and demand-side factors. On the supply side, mine output in South Africa and Zimbabwe has recovered following last year's flooding, and scrap volumes have risen. On the demand side, he pointed to softer consumption across multiple channels.
Chinese jewelry demand weakened as end-consumer appetite proved limited, while autocatalyst demand declined as greater adoption of electric vehicles reduced production of combustion-engine cars. With platinum again trading at a premium to palladium, Staunovo noted that some new vehicle models could switch back to palladium-based catalysts.
Investment flows also faltered: bar and coin purchases fell and exchange-traded funds experienced outflows. Industrial demand from the glass sector was identified as the only notable area of resilience for platinum.
Staunovo added that rising gold prices have provided some support to platinum due to the metals' historically strong correlation. UBS's price outlook for platinum calls for modest downside from current levels in the near term, followed by broadly sideways trading over the next 12 months.
Summary
UBS prefers gold over platinum into Q4 after platinum posted a second straight quarterly surplus. The World Platinum Investment Council reported significant surpluses for Q1 and Q2 and now expects a full-year surplus, mainly because of weaker investment demand, recovering mine supply, and softer jewelry and autocatalyst usage.
Key points
- Platinum posted a second consecutive quarterly surplus - Q2 surplus estimated at 244,000 ounces, or about 15% of global demand; Q1 surplus revised to 304,000 ounces.
- Full-year outlook shifted to a surplus of 265,000 ounces, primarily on weaker investment demand and higher mine and scrap supply.
- Sectors impacted include jewelry, automotive autocatalysts, mining supply from South Africa and Zimbabwe, and investment products such as bars, coins and ETFs.
Risks and uncertainties
- Persistently weak investment and jewelry demand could prolong surplus conditions, pressuring prices - this affects precious-metal investors and bullion markets.
- Further shifts in automotive catalyst materials - if new models revert to palladium, industrial demand for platinum could be further eroded, impacting the auto-supply chain.
- Mining and scrap supply volatility - while recent recovering mine output contributed to the surplus, any future disruptions or changes in scrap flows could alter the supply picture and market balances.