Platinum, palladium prices tank

The price of platinum lost more than $20 an ounce and sister metal palladium dropped 3% on Monday despite an ongoing strike at three top producers and strong investor interest.

On the Comex division of the New York Mercantile Exchange, platinum futures for July delivery – the most active contract – in early afternoon trade exchanged hands for $1,428.70 an ounce, down $23.10 compared to Friday's close and near the day's lows.

On the day before more than 70,000 South African workers went on strike at Anglo American Platinum (LON:AAL), Imapala Platinumm (OTCMKTS:IMPUY) and Lonmin (LON:LMI) which together account for almost 50% of the world's production, platinum was trading at $1,450 an ounce.

Roughly 10,000 ounces of production are lost each day the strike drags on and even after a resolution to the bitter dispute can be found it would take months for the affected mines to return to capacity.

Year to date platinum is up 3.7%, but remains $125 or 8% below where it was this time last year.

Palladium also fell on Monday with June futures last trading at $768.75, down 2.8% on the day and recovering slightly from a day low of $761.25.

Palladium which has been outperforming platinum, helped in part by tensions with Russia which together with South Africa control more than 70% of global supply.

The metal touched its highest level since September 2011 in March and is up 6.8% since the start of the year.

News that Sibayne Gold (NYSE:SBGL), turnaround specialists, may be interested in picking up the platinum assets of the strike-affected companies may account for some of the weakness on Monday although no formal talks have taken place.

A proposal by South Africa's state pension fund manager that producers should form a cartel to control the price has also been met with skepticism and called unfeasible.

The weakness in the PGM metals come despite a number of factors over and above the supply squeeze from South Africa and Russia and renewed demand from top consumer of PGMs, the European auto industry, that should combine to push the price much higher than it is today.

Futures and options speculators have been building net long positions in particularly platinum and there has been a surge in investor interest in physical platinum and palladium-backed exchange traded funds.

Johannesburg's NewPlat ETF topped one million ounces for the first time last week in the less than one-year old fund, while two newly-launched palladium ETFs ar said to have attracted more than 250,000 ounces.

Barrons.com quotes from a research note by investment bank HSBC which also argues for a higher platinum and palladium price:

Platinum: We continue to have a bullish bias towards platinum prices and expect the average price to reach USD1,595/oz in 2014. The strikes are further aggravating already tight production from South Africa and contributing to the market’s production/consumption deficit. Second, we expect good demand from the European auto sector where the more popular diesel-powered engines require heavier platinum loadings, than gasoline engines. Third, we anticipate further strength in jewelry demand from China as its growing middle class continues to seek out luxury goods. Taken together, these factors will further widen the expected demand/supply deficit for platinum and push prices higher.

Palladium: We are also bullish on palladium prices, where global supply is also constrained. Rising automotive demand from China and North America is particularly relevant to palladium due to the need for this metal in the gasoline-fired engines favored in these regions. We expect average prices to reach USD825/oz in 2014.