Palladium, an Underappreciated Investment ?
There are four precious metals that are thoroughly traded enough to justify being given a spot market code. Those four metals are gold, silver, platinum and palladium. Gold and silver have been used as de facto currencies since time immemorial. Platinum and palladium are late-comers to the game, only becoming widely traded in the 1800s.
Palladium, in particular, tends to be the most ignored sister of the four major precious metals. Palladium has a number of industrial uses, many of them similar to the uses of platinum. Its price also tends to track closely with the price of platinum. Even the use of palladium in jewelry is similar to the uses found for platinum, particularly as so-called white gold.
Why invest in palladium?
From an investing standpoint, palladium functions as a very viable substitute for trading in platinum. It also makes an excellent hedge against inflation. Palladium mining is fairly limited. Compared to gold, less than one-sixth the amount of newly mined palladium enters the global market each year. While there have been speculative bubbles in palladium, the metal has survived collapses with significantly less wealth destruction than has been seen in similar collapses in the gold market. Palladium tends to be a more stable investment over time than gold, while still retaining significant upside.
How to invest in palladium
One of the best places to check spot prices of palladium is Monex. The website offers not only spot prices for precious metals investing, but opportunities to trade. Monex enables traders to buy and sell gold, silver, bullion, platinum, palladium, coins and other precious metals. The interface is simple and easy to use.
Industrial uses of palladium
Over 50% of the world’s supply of palladium is directed toward a single industrial purpose. Palladium is heavily used in the production of catalytic converters. A catalytic converter is an essential component in the pollution control system of a modern automobile. The continued emphasis on reducing vehicle emissions is unlikely to abate anytime soon. With the emphasis on air quality improvement and reducing global warming, investors expect the demand for palladium in the automotive industry to increase over the next decade.
This also makes palladium an interesting type of hedge. Most precious metals investing is driven as a hedge against the policies of liberal governments. Gold, particularly, trades largely as a referendum on loose monetary policies. Palladium has the benefit of being a precious metal that trades better when liberal governments are in power. Liberal policies generally promote the expansion of pollution standards. These improvements in pollution standards tend to drive industrial demand for palladium.
Palladium also plays a key role in a number of other industries. Palladium is a key catalyzer in fuel cell technologies. This makes palladium an intriguing play on emerging energy technologies. The metal is popular in the making of high performance spark plugs, especially within the aircraft industry. Palladium is also used heavily in dentistry, hydrogen purification systems and the treatment of groundwater. Some electronic components also utilize palladium. Palladium also is used as a form of so-called white gold by the jewelry industry, although this utilization is negligible compared to other industrial uses.
Worldwide mining of palladium ranges just above 220 tons. Like other precious metals, very little new palladium is discovered in any given year. You can count on just two hands the number of large scale palladium mining areas there on the planet. The bulk of the world’s palladium is mined in Russia and South Africa. Russia is the world’s leading exporter of palladium, accounting for just over 40% of palladium sales. Canada and the United States also have smaller reserves of palladium. Most Candian palladium mining takes place around Thunder Bay, Ontario. Most American palladium mining takes place in Montana.
Since the end of the Second World War, there has been only one significant speculative bubble in palladium. That bubble was triggered by stockpiling of the metal by the Ford Motor Company, which was fearful about the supply of palladium for the manufacture of catalytic converters. Palladium peaked above $1,100 at that time.
While the bubble collapsed, palladium’s price retreated to its historical trend line, rather than collapsing below the trend line. Charts of palladium’s historical spot prices, available on Monex.com, show that the metal has a strong upward trend line, beginning in the late 1950s and continuing to the present day. With increased demand for precious metals in general, palladium’s spot price has recovered to near the $1,100 level it was at during the speculative bubble of 2001.
There is some downward pressure on the price of palladium. The biggest source of downward pressure is from the Russian government. During the Soviet era, a massive stockpile of palladium was built. The current Russian government has been releasing between 1.6 million and 2 million ounces of palladium onto the market each year. These releases have done little to drive down the price of palladium, and they have never pushed palladium below its historic trend line.
Unlike the other three major precious metals that trade worldwide, very little palladium actually circulates. Palladium is largely not used in coinage. It is rarely used in the production of jewelry. Palladium mostly goes into the market from mining and from salvage operations that scrap catalytic converters. Other than that, there is very little liquidity in the market. Palladium coins, when they do come to market, often trade above spot value, due to the lack of liquidity and carrying of the metal.
Strikes at mines in South Africa have become more common. This has caused reductions in production as high as 10% in 2011. Russia has also been cutting back sales of palladium from its stockpiles. A recent report from Barclays Capital said palladium usage is expected to outstrip new production by more than 500,000 troy ounces.
Relationship to platinum
Palladium has a very strong substitution effect with platinum. Platinum and palladium are used for many of the same industrial purposes. Their use in jewelry is almost identical. From an investing perspective, palladium and platinum are almost twins.
Historically, the effect has been for platinum to slightly drive down the price of palladium, with palladium being the metal of second resort. Palladium generally tracks a bit lower in spot price than platinum. But, palladium supplies continue to struggle to meet demand. This begs the question, will palladium spot prices close the gap with platinum in the coming decade?
Palladium is anchored by two things. One is significant industrial demand that exceeds the present available new production of the metal. Two is the broad demand for precious metals in general that has existed since governments worldwide started printing money to combat fears of recession. Neither condition is apt to abate any time in the next couple years.