Does a possible supply crunch make palladium a wise investment?

2nd November 2011

While the price of platinum rose to be on a par with gold recently, some said it was still worth a look. But there is also palladium, a metal found together in the same ore as platinum – and this is attracting interest from experts.

Rising industrial demand for palladium has seen its price creep upwards, according to Citywire. You may not have heard of this metal, but there are several reasons why you should, it adds.

The metal is a by-product of platinum production and is used mainly in the automotive industry to eliminate harmful emissions, with other uses in electronics, dentistry and jewellery. The soaring prices of precious metals have generated a growing interest in palladium wedding rings, which are lighter but similar to platinum and white gold.

Russia, the biggest producer of the metal, has been casting doubt on the future supply of the commodity, while demand is expected to soar from China's surging small-car industry. As you need palladium for cars, and China is the largest manufacturer of cars, overtaking the US recently, and the amount of palladium they use is much more than platinum, the outlook is appealing for those considering stock in the metal.

Palladium, along with platinum, is also used as catalysts in oil refining and chemicals industries, and in the manufacture of a wide diversity of products such as computer monitors, mobile phones, electronic weaponry, hard disc drives, temperature control instrumentation and synthetic fibres.

A possible supply crunch

As demand grows, there is the possibility of a possible supply crunch. For example, the amount of the metal that Russia released into the market fell in 2011 by 8% to 24 tonnes from 26 tonnes in 2010. The price of palladium has gathered momentum since July 2010, and has risen in value ahead of gains made by platinum.

South Africa is the second biggest producer of palladium, but it mostly comes as a by-product of nickel mining in Russia and Canada.

A word of caution

In the past Russia has been a 'swing supplier' into the market. It had a strategic stockpile generated during the Soviet Union, and put a stop to palladium supply in 2001, causing a price spike. Some car manufacturers were forced to buy platinum as a substitute during this period. Therefore, the reduced supply could be because it is actually dwinding, or that the markets are again being played. 

Interest in palladium has been negligible in the past, and is still small. Most production is not traded publicly, but sold directly by miners to users and merchants. Gold and silver have traditionally been regarded as potential investments and as alternatives to currencies, but there is no such tradition with platinum and palladium.

However, there are options for investors who are seeking alternative options for their portfolio. For example, the Schroder Alternative Solutions Gold and Precious Metals fund can invest up to 33% of its portfolio into metals other than gold.

Paula Bujia, manager of Schroders gold and precious metals fund, says: "Palladium and platinum have a higher percentage of industrial usage, and we're cautious for now. In the medium term, palladium, which is heavily used in the auto industry, will benefit from rising demand from China and other emerging markets. Platinum will benefit from stricter emission control regulations and supply constraints in South Africa, where 90% of the metal is produced. But we would typically hold more of these assets at a time when risk assets are doing well."

What are the options for investors?

Palladium coins – these can be purchased in much the same way as gold coins. Watch out for big dealer mark-ups where investors would need a substantial price rise before they can sell profitably. Always look for "bullion" coins rather than collectible or numismatic coins as the mark-up should be lower.

Bullion – some dealers sell bars of platinum (wafers for smaller sums).

Stocks – shares of listed mining companies – a number of mining stocks have exposure to platinum. Anglo American is not a pure platinum play but has substantial interests,  is a well researched share that is easy to trad and is a FTSE 100 constituent.

Funds – there are number such as the Schroders fund above although not all gold funds can invest in platinum.

ETFs – there are exchange traded funds in physical platinum as well as more exotic plays on the metal such as leveraged platinum (which exaggerates price changes)  or short platinum where you bet on the price falling.

Futures and options – here you take a short term position where gains can be magnified if investors are right or losses increased if they are wrong.

More from Mindful Money:

Platinum: Why all that glitters isn't (always) gold

The Commodities Bubble: Explained

Diamonds: Are an investor&#3
9;s best friend

To receive our free email newsletter sign up here.

Leave a Reply

Your email address will not be published. Required fields are marked *