South African investors can invest in platinum in various ways, depending on their unique needs and risk appetite, says JSE commodity derivatives director Chris Sturgess.

Platinum is considered valuable because the metal is rare and supply is restricted owing to a complex extraction process. It also has many commercial applications. Platinum has a chemical property used in catalytic converters to clean noxious pollutants from the exhausts of petrol and diesel engines and its appeal as jewellery continues to grow.

“Diversification is a prominent investment objective and investing in platinum could assist investors in building a diversified portfolio,” he says.

Investors seeking platinum exposure can consider trading shares and single stock futures (SSFs) in a platinum mining company, Sturgess says, adding that there are also exchange-traded notes (ETNs), exchange-traded funds (ETFs) or derivatives (futures and options) that benchmark off the liquid international markets.

South Africa’s listed platinum companies include Anglo Platinum, Impala Platinum and Lonmin.

“Investors should be aware that investing in platinum companies is not the same as investing in platinum itself. Investors can buy shares and/or SSFs in such companies through a broker or online share platform, for which the investor will be charged in both cases.”

As with buying any share, the quality and vision of company management and other factors will determine a share’s value as much as the price of platinum on the open market. The price of platinum could rise, but one may still lose money if a company is poorly managed or, for example, experiences supply issues. With share investing, investors need to be mindful of not only diversifying their risk but also conducting research on companies and sectors before deciding to invest.

When derivatives (futures or option contracts) are bought, the investor moves away from purely trading in shares and is buying into platinum futures. A futures contract is a legally binding agreement, giving the investor the right to buy or sell an underlying commodity at a fixed price at a future date. Unless this is an SSF on a platinum listed company, this contract gives investors exposure to the international commodities market.

Meanwhile, South Africans can also invest in platinum through ETFs or ETNs.

While ETFs and ETNs track the platinum price, a platinum ETF, such as financing, risk and asset management and advisory solutions provider Absa Capital’s NewPlat, is supported by actual platinum being stored in a vault, while in the case of a platinum ETN, the bank does not actually hold the platinum, but covers its liability through platinum futures contracts.

ETNs are unsecured debt securities that track the performance of a basket of shares, bonds or commodities, an interest rate or a single asset class. An ETF is a listed investment product that tracks the performance of a basket of securities such as shares, bonds or commodities.

“Where investing in ETNs exposes the investor to the credit risk of the issuer, ETFs do not. This means that, should an ETN issuer cease to exist, the ETN investor’s investment would not be protected,” says Sturgess.

Platinum ETFs and ETNs enable investors to own a piece of the metal without the risk of actually storing the bars or coins – the investor is merely exposed to the price performance of the metal.

Further, investors can also invest in platinum quanto futures through the JSE.

A quanto future is a derivative instrument that is a rand denominated commodity investment product, which delivers the same payoff as a pure dollar-denominated commodity investment. It enables investors to gain exposure to the foreign underlying commodity, while not being exposed to the influence of the dollar:rand exchange rate. This simplifies the investment decision and allows for a focus on the returns of the underlying commodity only.

Sturgess points out that, with an ETF, ETN or shares, an inves- tor can only increase his or her investment if the price of platinum goes up. However, with a derivatives futures contract, an investor can trade in both directions of the market. Thus, if the investor has a view that the price of platinum will fall, he or she can sell the derivatives contract.

“However, investing in derivatives is for the slightly more sophisticated investor and offers flexibility and gearing. For someone who has only a limited amount of money to invest, a straightforward ETN or ETF in platinum is an easier route through which to get exposed to platinum, given the investor’s belief that the platinum price is going to improve,” Sturgess concludes.