Palladium shines as investors' gold

FPI / January 20, 2020

Analysis by Andrew Moran, LibertyNation.com

All the glitter is on gold, all the shine is on silver, and all the rust is on copper. Another metal is captivating investors everywhere, though – and that metal is palladium. As global financial markets pay close attention to the main class – gold, silver, and copper – they may have missed out on this key commodity that is primarily used in automobile manufacturing.

Since January 2016, palladium has been quietly carving its path and shattering the old records of its metallic brethren. The age-old market questions apply to this industrial metal: What is driving its meteoric ascent? Is it a bubble? Is it too late to buy?

Palladium futures recently touched a record high of $2,300 per ounce, while spot prices exceeded $2,500. The metal just had its best weekly performance in about 20 years. If you had been paying attention to the palladium market over the last 12 months, you might have noticed the violent swings from session to session; it is up $70 and then it is down $55. Of course, amid its 200% ascent over the last four years, it is safe to say that there have been more ups than downs.

Driving palladium’s dramatic increase is a fundamental supply and demand issue. One London metals trader summed up the current conditions for palladium to Reuters: “There’s no metal.” For nearly a decade, palladium inventories have been in a deficit, mainly because the output is lagging. South Africa is the second-biggest producer, for example, but that nation is experiencing routine power outages, and poor infrastructure is disrupting mining operations.

Markets are forecasting that there will be a shortfall of about 700,000 ounces in 2020 and 2021. Surely, there cannot be such a huge demand for it, right?

In recent years, some of the biggest markets have been introducing new emission standards to limit their environmental footprint. The one sector that is helping to lead the charge – voluntarily or by legislative mandate – is the automobile industry. Automakers are purchasing large volumes of the metal because it is used for catalytic converters that regulate exhaust emissions. Whether it is due to consumer trends or government coercion, car manufacturers in China, the U.S., and India are improving their emission requirements.

Because supplies are tight, there are reports that vehicle manufacturers might switch to its sister metal, platinum, to help curb their pollution. Platinum is more than half the price of palladium, trading at around $1,000 an ounce. It is unclear if platinum can be a suitable replacement, but if automakers wish to keep their costs in check and maintain competitive pricing, it will need to be.

Will 2020 be another big year for palladium? The consensus on The Street is that it will have another bullish run, citing supply and demand factors. However, that does not mean there will not be a correction and a huge profit-taking selloff, though such a situation would be short-lived. It would be comparable to what happened last year when the metal rallied right out the gate, but then slumped by 13% – a correction is defined as between 10% and 20%. Some estimates are calling for palladium to average around $2,250 for the rest of the year.

In today’s central bank-induced bubblemania, we are quick to call everything a bubble, which is when farfetched projections drive asset prices or when the price exceeds its inherent value. Does this definition apply to palladium? Not quite. Every year, the auto industry’s demand keeps incrementally rising; going from under six million ounces to a little more than nine million ounces between 2010 and 2019. With the planet adopting stricter emission standards, palladium will continue to be integral to most passenger vehicles with internal combustion engines (ICE) and hybrid engines.

Until supplies can match demand, prices will remain high, informing producers of the immense need. It is hard to believe that implausible speculation instead of the fundamentals are causing palladium’s spike.

Interested in getting in on the action? Good luck. Any available inventories, as metal commodity traders confirm, are being shipped to China. Aside from physical ownership, you can always purchase exchange-traded funds (ETFs) in countries that are palladium producers (South Africa and Russia) or products with exposure, like the Physical Palladium Shares ETF (PALL) and the Physical Precious Metals Basket Shares. Whatever you choose to do, palladium is a case study in supply and demand and is certainly a teachable moment in economics.

Free Press International