The Precious Metals Platform
ETF Securities stresses that its precious metals funds are physically backed. This has the advantage of giving the owner of the fund effective ownership of the physical metals, so there's no counterparty risk-a major concern of investors since 2008. "These ETFs can't be issued until the physical metal is actually in the vault," says Brooks.
A physically backed ETF has no cash or derivative component; it simply tracks the up and down movements of the spot price. This makes it easy for investors to understand what they are buying, he says.
Brooks notes that precious metals are unique in being able to be stored. They are also homogeneous, with clear, delineated values. They can be approved by the London Bullion Market Association or the London Platinum and Palladium Market, and they have numbers on them. "It's a very straightforward way to ensure that investors are getting what they're investing in. When you move into other areas, it's much more difficult to create a robust investment product for investors," he says.
Wheat or livestock, by comparison, are commodities that can't be stored for any length of time, and they're not homogeneous. "One bushel of wheat may be different from another bushel, and therefore investors may argue about what they're actually investing in," says Brooks.
Platinum, palladium, gold and silver are rare metals of high economic unit value.
Platinum and palladium: Over the past five years, platinum and palladium have outperformed key U.S. equity, bond and commodity benchmarks by between 40 and 200 percentage points, according to ETFS. In 2009, platinum and palladium prices rose sharply (up 57% and 118%, respectively), well above major equity, bond and broad commodity benchmarks. In fact, palladium was the strongest performing commodity after lead and copper last year.
These precious metals have substantial industrial applications. They're soft, ductile and resistant to oxidation and high temperature corrosion. Because of their low reactivity and durability, platinum and palladium are useful as chemical catalysts, particularly in catalytic converters for car emission reduction. Indeed, these account for 49% of the demand for platinum and 54% for the demand of palladium. Platinum is more in demand for jewelry, 24% compared to 13% for palladium. The two metals are also used for dental applications and other industrial uses, in addition to its investment use.
The prices of the two metals tend to have a strong positive relationship because palladium can be substituted for platinum in certain applications, such as diesel catalytic converters. In coming years, platinum and palladium demand is expected to be supported by the burgeoning sales of motor vehicles in emerging markets and by the attendant tightening of emission standards. China stands out. Per capita auto demand there is projected to rise from 8.5 per 1,000 people in 1995 to 55 in 2015 as per capita income rises, according to ETFS, citing World Bank data.
Platinum production is concentrated in South Africa (78%) and Russia (12%), while palladium production takes place mainly in Russia (50%) and South Africa (35%). Annual mine production fell over the five years ended 2009 because of labor constraints (on insufficient number of skilled workers as well as strikes and social unrest over safety and wages), aging equipment, weather and severe power problems in South Africa.
Gold: According to ETFS, jewelry accounts for a little more than half of global gold demand, while investment accounts for more than a third of demand. Investment demand for gold rose by nearly 10% in 2009, offsetting a fall in coin and bar investment. This indicates money switched from coins and bar holdings into more liquid, transparent and secure ETF holdings.
Only about 60% of annual gold demand is met with new mine supply. Rising prices are resulting in increased gold recycling. Central banks have substantially reduced net sales during the past two years and in three of the past four years.