A Pinch For Palladium, Platinum ETFs

Gold and the corresponding exchange traded products have gotten some negative attention this week following the Federal Reserve's latest meeting. Although the Fed opted to once again stand pat on interest rates, market observers are adjusting their expectations upward that the central bank will boost borrowing costs in December.

That is good news for the dollar and bad news for dollar-denominated commodities, such as precious metals. Platinum- and palladium-backed ETFs are also being pinched by speculation that the Fed is close raising rates...sort of.

“Platinum-backed funds have seen outflows of just over 160,000 ounces so far in October, taking their holdings to their lowest since early 2014 at 2.232 million ounces. The bulk of the selling was seen from the Johannesburg-listed NewPlat ETF operated by Absa Capital, which has seen its holdings fall 134,000 ounces this month,” reports Reuters. 

The outflows story for palladium and platinum ETFs listed in the U.S. is a bit more sanguine. This month, the ETFS Physical Palladium Shares PALL and the ETFS Physical Platinum Shares PPLT have lost just $12.9 million in assets combined.

As far as PALL is concerned, modest asset is loss is not surprising as traders have perhaps been looking to take profits in the palladium ETF after the fund surged on the back of the Volkswagen AG VLKAY controversy. In terms of price action, PALL is off just a tenth of a percent this month while PPLT has surged nearly nine percent. 

Although some commodities investors and traders outside of the U.S. have become cautious on palladium and platinum, an obvious equity-based derivative play on the prices of those metals has been soaring this month as well.

The iShares MSCI South Africa ETF EZA is up 5.5 percent this month. Though that performance lags the MSCI Emerging Markets Index by about 50 basis points, EZA's October strength is impressive on a couple of levels.

First, South Africa is the world's largest platinum-producing country and the second-largest palladium producer behind Russia. That is to say although the materials sector is not a significant part of EZA, price action in those metals looms large for South African equities.

Second, investors, to the extent that they can be, appear comfortable with the fact that South Africa could very well be the next emerging market to suffer a sovereign credit downgrade at the hands of one of the major ratings agencies. Maybe Turkey will beat South Africa to that dubious punch, but a rating downgrade is still on the table for Africa's second-largest economy.