Fresh from the Trading Room: Pass the baton

Investors will focus on the interest rate decisions of the major central banks over the next two weeks.

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Since the beginning of 2023, both gold and silver have experienced substantial price increases. In contrast, platinum has remained stagnant, significantly lagging behind.

The platinum-to-gold price ratio is currently at a historical low. The last time the ratio reached this level was during the pandemic selloff, after which platinum outperformed gold, leading to a rapid rebound in late 2020.

Platinum is approaching the resistance level of a multi-decade descending triangle. A breakout above this resistance could trigger a substantial upward movement.

The ZAR/USD pair is at a historical low as the South African Rand continues to weaken against the U.S. Dollar. However, it appears to be forming a falling wedge bottom, with no new lows since 2023, suggesting a potential reversal.

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The Precious Metals market has experienced a remarkable surge over the past few months. Notably, the renowned Big Short hedge fund manager, Michael Burry, disclosed in his latest 13F filing that physical gold was his largest addition in Q1 2024. It now ranks as the fifth-largest position in his fund, Scion Asset Management. This enthusiasm is not limited to professionals; retail investors on popular social media platforms are also showing significant interest, particularly in gold and silver.

We have long expressed our bullish outlook on precious metals, even before gold broke through the multi-year resistance at $2100, which captured widespread attention. However, our current focus has shifted to another under loved metal within the precious metals group compared to gold and silver. We believe this metal is poised for a significant upward movement, with the catalyst already in place. Yes, it is platinum.

Platinum is one of the rarest metals on earth, with production volumes significantly lower than those of gold and silver. Often mined as a by-product of nickel and copper mining, platinum has extensive industrial applications due to its chemical stability and ductility. It is widely used in catalytic converters in automobiles, oil refineries, medical equipment and other chemical and electronics industries. South Africa is the world's largest platinum producer, accounting for nearly 80% of global production, followed by Russia and Zimbabwe. Consequently, the production, supply and price of platinum are highly dependent on South Africa's economy and politics.

On May 29, 2024, South Africa held its General Election to elect a new National Assembly and provincial legislatures in each of the nine provinces. This election marked the end of three decades of dominance by the ruling party, the African National Congress (ANC). The ANC has won every national election by a landslide victory since 1994, but its support has dwindled over the past decade as the economy stagnated, unemployment rose and infrastructure deteriorated. South Africa has now entered a new era of coalition politics, with the potential for the main opposition parties, the Democratic Alliance (DA) and uMkhonto weSizwe (MK), a new party led by former president Jacob Zuma, to gain power. The current societal and economic issues create fertile ground for populist movements. Such rhetoric and policies are prone to labor strikes and social unrest, creating an unpredictable regulatory environment that deters investment and complicates operations for mining companies.

Therefore, the political uncertainty in South Africa could brew a powerful catalyst for a global shortage or disruption of platinum production, potentially driving a significant price increase. Even if political conditions stabilize and remain pro-business and pro-investment, we expect platinum to gradually catch up with its precious metal peers, gold and silver, over time. Additionally, we suggest considering a hedge against these risks by going long on the South African rand against the U.S. dollar, which is currently at a historical low. If a more favorable political scenario unfolds, we anticipate the rand will strengthen as investor confidence grows.

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We consider expressing our views via the following hypothetical trades¹:

Case study 1: Long Platinum futures

We would consider taking a long position in platinum futures (PLN4) at the current price of 1144, with a stop-loss below 994, a hypothetical maximum loss of 1144 – 994 = 150 points. Looking at Figure 3, if platinum breaks out from the descending triangle resistance, its prices have the potential to reach 2200, resulting in 2200 – 1144 = 1056 points. Each Platinum futures contract represents 50 troy ounces of platinum; each point move is USD 50.

Case study 2: Long ZAR/USD futures

We would consider taking a long position in ZAR/USD futures (6ZM4) at the current price of 0.05322, with a stop-loss below 0.04922, a hypothetical maximum loss of 0.05322 – 0.04922 = 0.004 points. Looking at Figure 4, if the bottom reversal continues, ZAR/USD prices have the potential to reach 0.0853, resulting in 0.0853 – 0.05322 = 0.03208 points. Each ZAR/USD futures contract represents 500,000 South African rand; each point move is USD 500,000.

¹ Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.

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