2014 Palladium Investing

Gold and silver may not have been very friendly to investors these past couple of years. But one precious metal certainly has been a real pal: palladium, commodity symbol PA, ETF symbol PALL.

As the only member of the precious metals group to be positive year-to-date at +5.8%, palladium has the advantage of being a multi-purpose metal used by a wide array of industries from automotive to high tech to jewelry.

What is more, supply conditions are so turbulent and demand is so insatiable that Bank of Montreal Research has named palladium one of its preferred mined commodities for 2014, while Toronto Dominion Securities anticipates a sturdy 13% rise in price by the end of 2014’s Q1.

Just what is so valuable about this rarely talked about metal? Are its supply and demand fundamentals really that much better than gold’s or silver’s? And how can investors hold it without risking a fortune in its 100 ounce $75,000 futures contracts?

Everyone Wants Some Pals

The demand for palladium is something to marvel at. Its broad-ranging uses include jewelry, dentistry, watch making, electronic circuitry, even instruments – both medical and musical.

But by far the metal’s greatest use is in catalytic converters – pollution control devices used in automobiles, factories, and power turbines – as palladium’s atoms are extremely effective at trapping carbon particle emissions.

While Western nations have been implementing pollution control standards for years, in developing countries such as China and India, where pollution controls are almost non-existent, smog still poses severe health and environmental hazards. As more and more countries around the world strive to improve their pollution control standards, and with automobile production on the rise in China, India, Russia, and Brazil especially, we can expect palladium’s demand to rise steadily for years to come.

Just coming off of its highest ever annual global demand of 9.32 million ounces in 2012, palladium’s demand this year has reached a new all-time high of 9.7 to 9.8 million ounces, while 2014’s demand is expected to easily surpass 10 million.

Good Pals are Hard to Find

But supply issues continue to plague the industry. Palladium deposits are rare enough to begin with, the four highest concentrations located in the Transvaal Basin in South Africa, which supplies almost a full third of global demand, the Norilsk Complex in Russia, the Stillwater Complex in Montana, U.S.A., and the Thunder Bay District in Ontario, Canada.

Add to that scarcity such issues as labor strikes in South Africa and suspected stockpile depletions in Russia, and you really have a case for higher palladium prices going forward.

“There have been less supplies in the market, with reduced Russian supplies in particular,” Bill O’Neill, a principal at LOGIC Advisors, informed Forbes. The report suspects Russia is not forthcoming with its real inventory figures, which are a “closely-guarded secret.”

According to Thomson Reuters GFMS, Russia has been slowly selling off its palladium stockpile for years, over and above the exports from its mines. The steady decline in Russian stockpile sales from 800,000 ounces in 2011 to 400,000 ounces in 2012 to an expected 200,000 ounces this year, presumably ending completely by 2014, leads many to believe Russia’s palladium reserves are almost completely gone. Image what that news will do to the metal’s price should it ever be officially confirmed.

Comparing global supplies of 8.8 to 9 million ounces annually from all sources including scraps, BMO Research recently projected a supply deficit of 757,000 ounces for 2013, rising to an 824,000 ounce shortfall next year.

Good Pals are Truly Precious

Palladium’s supply-demand fundamentals, therefore, call for much higher prices going forward.

“If supplies continue to go at the current level, you could see this market go another $50 to $75 higher,” O’Neill projected to Forbes. Meanwhile, TD Securities foresees prices jumping some $100 an ounce from today’s $750 to $850 by the end of Q1 2014, a gain of some 13%.

Yet O’Neill cautions investors to be cognizant of how palladium’s relatively small market is often overpowered by its much more popular sister, gold. “The only problem,” he points out to Forbes, “would be if we would see a sharp break in gold prices. As you know, gold has a certain leadership quality that could limit the upside for palladium.”

A chart comparison of the two metals shows that when sentiment toward gold sours, all precious metals suffer humiliation by association. But once those temporary bouts of panic subside, market fundamentals once again dictate the trade, and palladium quickly returns to its true levels.

Palladium’s tighter underlying fundamentals actually give it greater price stability than gold. While gold’s 52-week performance has ranged between $1,180 and $1,790 for a volatility of $610, or 20.5% above and below its $1,485 mid-range price, palladium has ranged between $588 and $785 for a volatility of $197, or 14.3% above and below its $686.50 mid-range price.

More attractive still is palladium’s overall price performance relative to gold:

Investors looking to take advantage of palladium’s increasing demand, decreasing supply, upward price trajectory, and sounder price stability need not risk so much on the high priced futures market. Since early 2010, the ETFS Physical Palladium Shares ETF (NYSE: PALL), which holds physical palladium bullion, has enabled investors to purchase shares priced at roughly one tenth of an ounce of the metal, currently trading at just over $73 a share.

While gold is down some 32% off its 2011 all-time high, with downward pressure still hampering its recovery, palladium is holding strong at just 13% below its 2011 all-time high, with future prospects that out-glisten even its more famous precious metals sisters.

Joseph Cafariello

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