The growing popularity of exchange-traded funds (ETFs) has helped squeeze an already tight platinum market and heightened price volatility, and there is no sign of the trend changing this year.

This means the market is likely to continue to be choppy and hit new highs this year on rising demand and output problems in South Africa, analysts say, with high prices luring more investors into ETFs and putting more upward pressure on prices.

ETFs are listed on stock exchanges and offer investors exposure in the underlying commodity without taking physical delivery. Sponsors of such funds buy a matching amount of the commodity and keep it in bank vaults.

The funds, launched a year ago, have so far seen investment equal 410,000 ounces, or 6 percent of global annual supply of the metal, and analysts predict that figure could rise to nearly 10 percent by the end of the current year.

London-based ETF Securities has seen its holdings
spiking 150 percent this year to a record high of 356,000 ounces this week, while Zurich Cantonal Bank's ETF has risen 20 percent to 53,000 ounces in the past three months.

The two platinum funds now hold about 85 percent of last year's global market deficit of 480,000 ounces.

Should this trend persist, then conceivably 600,000 ounces of platinum could be held in these products by year-end, said Edel Tully, metals analyst at Mitsui Precious Metals.

This metal will remain off the market, and with already constrained mine supply, gives the platinum market very little breathing room, she said.

Platinum prices hit a record of $2,290 an ounce in March following power cuts in South Africa that forced mines to shut for five days in January. Some mines in the country, which accounts for 80 percent of global output, are still operating below full electricity supply.

The metal slipped to a low of $1,821 in early May before rising to around $2,180 an ounce on Thursday. Prices are now about 40 percent higher than at the start of 2008.

On the one hand we have got the supply disruptions and on the other hand we have got the ETFs coming into the market and bringing in demand that would not have been there, said Michael Widmer, metals analyst at Lehman Brothers.

It has contributed to the upward pressure. In a tight market, having one demand source that hasn't been there before increases the market tightness. It has to be bullish.


Johnson Matthey, the world's largest platinum distributor, said on Monday the ETFs had shown that there was substantial retail and fund interest in the product, besides making investments simpler and more attractive.

Activity in these funds was limited for the first few months of their launch last year, but the investment rate dramatically rose between late-2007 and early-2008 as prices rose.

The bullish feature for the PGMs of these ETFs is that they move metal out of hidden or unallocated inventory into the public domain, giving the market more visibility, said Nick Moore, an analyst at ABN AMRO, referring to platinum group metals.

Analysts said the ETFs attracted various types of investors, such as institutions, pension funds, hedge funds, brokers and retail investors.

The platinum ETF listed in Zurich was more oriented towards institutional clients, while the London-based ETF was more geared to retail-investors, they said.

They have been pretty successful in showing that there is an investor interest from a slightly different group of people, said David Jollie, publications manager at Johnson Matthey.

(Editing by Ben Tan)

(c) Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.