The direct ownership of platinum or other precious metals appeals to many investors who value the sense of security that comes with physically possessing the metal, as opposed to relying on others to hold it on their behalf.
The perceived security of owning physical platinum is a valid consideration for those who prioritize this aspect, even if it means sacrificing some of the liquidity and ease of trading that other investment options may offer. Physical platinum cannot be bought and sold as swiftly and efficiently as other means of speculating on platinum, where the metal itself does not change hands.
In the world of platinum trading for speculative purposes, the majority of transactions do not involve the physical transfer of platinum. Many investors participate in platinum speculation without any intention of owning or holding the metal themselves. Instead, they use instruments like futures contracts or platinum exchange-traded notes, which are funds based on platinum futures.
The efficiency of various platinum investment methods can be ranked on a scale, with buying and physically holding platinum bars and coins being the least efficient due to higher transaction costs. Buying allocated platinum held by third parties reduces these costs since the metal is not delivered to the buyer.
Exchange-traded funds take it a step further by not only avoiding physical delivery but also leveraging the buying power of a larger group of investors to achieve cost efficiencies.
Platinum futures contracts typically do not involve the transfer of physical platinum, and contracts for difference never require it. In fact, with contracts for difference, the order for platinum may not even be executed on the market, as the broker can cover the position internally.
Many investors prefer their investment to represent an actual amount of platinum held somewhere, rather than being just a paper position whose value tracks the platinum market. Platinum exchange-traded funds (ETFs) offer the opportunity to achieve both goals, providing a tangible connection to the metal while still maintaining efficiency and liquidity in the investment process.
ETFs Effectively Manage Transaction Costs
When considering purchasing platinum on your own, you should be aware of the significant transaction costs involved, especially when compared to other methods of controlling a position that mirrors the market price of platinum.
The price of platinum in the market reflects the cost of transacting large quantities, which is beyond the means of most individual platinum investors. The size of an order matters, and smaller orders placed by individual investors typically come with higher round turn trade costs compared to larger institutional orders.
Buying platinum from a retail dealer involves covering their costs, resulting in a significant markup compared to the spot market price. For instance, if the spread on the spot market is $5 per ounce, buying from a retail dealer could mean paying over $100 more due to multiple markups in the supply chain.
For individual investors looking to own a few ounces of platinum, achieving direct ownership is challenging without going through a retail dealer. However, the landscape has changed with the advent of platinum ETFs, which offer the potential to reduce the spread and approximate the spot market price more closely.
By teaming up with other investors, the combined funds available for investing in platinum can increase significantly, enabling more efficient buying and selling, leading to reduced trading costs. Platinum ETFs are built on this principle, providing better spreads than individual orders and contributing to their popularity, along with ETFs based on other precious metals like gold and silver.
While owning shares in a platinum ETF means holding a fractional ownership of a platinum pool managed by the fund, rather than holding the platinum directly, the improved spreads make it an attractive option for investors looking to speculate on platinum without physically possessing it.
The Greater Liquidity of Platinum ETFs
Platinum ETFs offer several significant benefits over owning physical platinum directly. One major advantage is the ability to get better prices for platinum transactions. ETFs allow investors to achieve more competitive pricing due to their ability to trade in real-time on exchanges.
The timeliness of trades and the convenience involved are the two main benefits of trading platinum ETFs. When trading ETFs, the entire transaction can be completed within seconds. With just a click of a mouse, investors can buy or sell shares, and the market fills the order instantly. In contrast, buying physical platinum involves placing an order with a dealer, waiting for the order to be filled, and arranging for shipping or pickup, which can be cumbersome and time-consuming.
The convenience of trading platinum ETFs is unmatched. Investors can easily buy and sell shares online, without the need to worry about taking physical delivery of the metal. The process is much simpler and more efficient than dealing with physical platinum. Additionally, the ability to trade during normal market hours further enhances the convenience of ETF trading.
Placing and closing positions in platinum ETFs is quick and straightforward. If an investor changes their mind shortly after making a trade, they can close the position in seconds. In contrast, physical platinum delivery may not have even arrived yet, making it a much lengthier and less flexible process.
Platinum ETFs offer the advantage of efficiently controlling real positions in platinum, similar to paper trading or derivatives trading. Although ETFs involve actual ownership of platinum, they provide the convenience and efficiency of purely economic positions based on changing prices. This appeals to many investors, especially those who value the benefits of platinum ownership without the logistical complexities involved in physical possession.
ETFs Allow You To Speculate on Platinum Price Decreases As Well
When you buy platinum, it means you are taking a long position, expecting the value of your investment to increase as the price of platinum rises, and decrease as it falls. In the past, this was the only way to speculate on platinum. However, nowadays, investors have more options, such as selling short shares of ETFs or buying inverse ETFs, which allow them to bet on platinum’s price going down.
Selling short means borrowing platinum shares from brokers with the intention of returning them later. For example, if platinum is selling at $1000 an ounce and you sell an ounce’s worth, and the price drops to $900, buying to cover the short sale is as if you bought it at $900 and sold it at $1000, albeit in reverse order.
Platinum’s price is volatile in both directions, offering opportunities for speculators to profit from both price increases and decreases. Timing the market can benefit investors, regardless of their investment horizon. Trusting the market’s whims rather than exercising skillful control over trades is not advisable. Active management is especially crucial for investing in platinum, as it may not consistently accrue value over time, unlike other precious metals.
Platinum ETFs have revolutionized investing in platinum, providing lower management fees, as low as 0.6% per year. They offer enhanced flexibility and significantly lower transaction costs compared to buying platinum independently. As more investors become aware of these advantages, platinum ETFs are likely to grow in popularity.
