The Hybrid Surprise: Watching Precious Metals

Precious metals corrected hard in the second quarter — gold, silver, platinum, palladium down 15 to 22 percent — driven overwhelmingly by ETF liquidation, not fundamentals. Beneath the paper flows, platinum sits at a 2,400-dollar discount to gold, hybrids need more PGM per vehicle than the ICE they replace, and the WPIC has begun quietly revising demand forecasts upward. The correction is where the entry is.

I. The Central Fact: A Paper Correction, Not a Fundamental One

The second quarter delivered a brutal reset across the precious complex. Gold fell 15 percent, silver 21, platinum 20, palladium 22. Most of the platinum-group weakness had nothing to do with automotive demand or a supply surprise: it came from ETF liquidation. The two physical platinum vehicles we track — the Aberdeen Physical Platinum Shares ETF and the GraniteShares Platinum Trust — redeemed roughly 500,000 ounces of platinum in the first half. That is close to 10 percent of the entire platinum market. Palladium ETFs redeemed another 300,000 ounces. In 2025 the same vehicles had accumulated almost 200,000 ounces of platinum and nearly 500,000 of palladium. The full swing between the two years was enormous.

The shares-outstanding charts suggest that this liquidation is now largely spent. Meanwhile, the underlying physical markets remain tight. Platinum lease rates hit 35 percent in July 2025 — a level that made clear how depleted above-ground stocks had become — before falling back toward 2 percent as ETF selling returned metal to the tape. But ETF liquidation does not create new platinum. It transfers existing inventory from one owner to another. The market's floor is not what the paper flows say it is; it is what the mines can produce, what the recyclers can recover, and what the auto industry still needs. On all three counts, the picture beneath the sell-off has quietly improved.

II. Analysis: The Hybrid Rewrite of Automotive PGM Demand

Every long-term PGM model in circulation still assumes automotive catalyst demand declines as EVs displace the internal-combustion engine. Platinum has about 35 percent of its demand tied to auto catalysts, palladium about 75. Battery EVs need no catalyst. On the standard reading, the destination is bleak. The problem with the standard reading is that it assumes a linear substitution from ICE to battery EV that is no longer occurring. Chinese and Western data now show it plainly: hybrid sales are accelerating, battery-EV enthusiasm is receding, and the shift is large enough that it now appears regularly in the general press. Honda has redirected 20 billion dollars toward hybrids and introduced 15 new hybrid models, including full-size SUVs for the first time.

The mechanical detail that matters is this: hybrid vehicles require greater PGM loadings than the conventional internal-combustion engines they replace. A conventional ICE runs continuously and keeps its catalytic converter hot. A hybrid repeatedly shuts down and restarts, so its catalyst operates at lower average temperatures. Catalysts run most efficiently hot; to hit the same emissions standards at lower temperature, the hybrid needs more platinum, palladium and rhodium per vehicle. If hybrids come to dominate the passenger fleet — which the sales trend increasingly suggests — automotive PGM demand does not decline. It grows. Our energy-return-on-energy-invested framework has argued this for years; the market is finally beginning to see it in the sales data. In its June update, the WPIC raised its 2026-2030 platinum and palladium demand assumptions by 1.5 and 1.9 percent per year respectively, citing healthy underlying automotive demand and a redistribution of geographic EV take-up. We suspect this revision is the first, not the last.

III. Implications: A Deficit Market Whose Buffers Are Almost Empty

Platinum has now run three consecutive annual deficits above 1 million ounces. Even after allowing for the metal returned by ETF selling in the first half, the WPIC still expects a deficit of roughly 300,000 ounces this year, and averaging more than 300,000 ounces per year through 2030. Palladium was expected to run a modest surplus in 2026; instead it is now projected to record another deficit — around 100,000 ounces — on repeated mine-supply and recycled-metal disappointments. Recycled platinum only returned 1.24 million ounces last year against a projected recovery toward the 2021 peak of 1.6 million; used-car prices have kept creeping higher, and owners are simply not scrapping.

Above-ground inventories tell the tightest story. According to the WPIC, above-ground platinum stocks have fallen approximately 60 percent over the past three years. The lease-rate spike to 35 percent last July made the exhaustion visible for a moment. The ETF liquidation of this year masked it. But the mechanism has not changed: persistent deficits against critically low stocks eventually produce violent price spikes. Meanwhile, platinum trades at approximately a 2,400 dollar discount to gold. In the first quarter of 2008, it commanded a 1,250 dollar premium. The full swing is 3,650 dollars per ounce — a re-rating that has nothing to do with the metal's utility and everything to do with a narrative about EVs that reality has begun to erode.

IV. The Position: The Correction Is the Entry

We took the correction in the face. The GDX has fallen approximately 40 percent from its February peak. Valterra, Impala and Sibanye — the three PGM producers we own — are down roughly 45, 50 and 60 percent from theirs. In hindsight we should have taken profits when we trimmed our gold exposure at the end of last year. That is a portfolio mistake, and I take it. It is not the same as being wrong about the underlying thesis. The thesis has strengthened, not weakened. The ETF outflow that broke the price is spent. The mines are not delivering. Recycling continues to disappoint. And the demand variable no one has in their model — hybrids requiring more PGM per vehicle than ICE — is starting to reveal itself in the sales data.

The valuation is where a European investor makes the case for adding today. Gold and silver still have room to run in this commodity cycle; but the mispricing is loudest in the PGMs. Platinum against gold is at an extreme not seen in modern history. The underlying deficit persists. The hybrid rewrite is under-priced in every published model. And the temporary relief provided by ETF selling has almost run its course. The paper correction is drawing to a close. The physical squeeze has not. This is where I would be adding platinum, palladium and rhodium exposure, and their related equities, with patience.