Several sources are now reporting an increasing supply deficit for palladium in 2017. According to a report by the Financial Times, “the palladium market is witnessing a rising deficit”. This would mark the sixth successive year of significant supply shortages in the palladium market, whereas its sibling platinum this year may be experiencing its first supply surplus in six years.
Best-performing precious metal year-to-date
In addition to this, as we have previously reported here on Hacked.com, palladium has outperformed both gold, silver, and platinum by more than 300% since 2009, and outperformed all other commodities in the Bloomberg Commodity Index so far in 2017.
The chart below shows the price of palladium in US Dollars over the last 12-month period. As you can see, this is a healthy trending market, trading above both the 50 and 100 day moving averages. It is exactly the type of market any trend following trader should be invested in.
Strong fundamental support
Palladium is an industrial metal primarily used as an important component in catalytic converters that reduce the amount of harmful air pollutants from cars. As we have spoken about before, some analysts believe that this will continue to drive the price of palladium higher, as China and other large developing countries are stepping up the fight against air pollution.
Platinum, on the other hand, is used in diesel-fueled cars, which are now experiencing a downturn mainly due to environmental concerns. As the trend of gasoline fuel being favored over diesel continues, the price of palladium is expected to continue to rise at the expense of platinum, and may soon surpass it, despite being known as a “lesser” metal.
Limited and vulnerable supply
Being far rarer than both gold and silver, palladium (and platinum, for that matter) is almost exclusively mined in only two countries; Russia and South Africa. In the case of South Africa, output of this precious metal is under pressure from political instability, labor strikes, high operating costs for miners, and infrastructure problems. The Russian production is relatively stable, but there are almost no new palladium mining operations being started, even as demand for the metal is continuing to grow.
How do I play the surge in palladium?
Probably the best way to play the palladium market is through the ETFS Physical Palladium Shares with the ticker code PALL. This ETF is backed by physical palladium bullion bars stored in its vaults in London and Zurich. ETF’s are in many cases a cheaper option for long-term investments in precious metals, when compared with physical ownership, and they can be traded through most online brokers.
Many brokers also let you trade palladium on margin in the forex market under the name XPDUSD, as shown in the screenshot below from my Saxo Bank brokerage account.
This is the option I recommend for shorter-term trading, because of the relatively low transaction cost compared with the benefits of the leverage you get. Keep in mind, however, that spreads can be wide for metals like palladium, as there is far less trading activity in them than for example in the gold and silver markets.
Although physical ownership is sometimes more expensive than simply investing in an ETF, it comes with a good sense of security, has an inherent value for collectors, and is not subject to any third party risks. You can touch and feel your own precious metal without involving the taxman or the bank at any step of the way. It is perhaps the ultimate solution for the small investor who just feels good about keeping a portion of his wealth in a tangible asset.
You may also choose to buy physical bars or coins and have it stored in a vault for you. Great places both for buying and storing precious metals is Hong Kong and Singapore, where you can trade physical precious metals at some of the lowest buy/sell spreads in the world, as well as storing it for a very low cost.
What’s next for palladium
Despite having risen almost 50% over the last 12 months, palladium may well continue to climb further. There is no new supply coming to the market, and demand for gasoline-fueled cars (at the expense of diesel-fueled cars) continues to grow from emerging markets.
When people look to invest in precious metals, gold is usually what comes to mind. However, with the increasing industrial demand for the other precious metals, in addition to investment demand, it is clear that there may be more potential for profit with some of gold’s less shiny siblings. In this respect, palladium is well-positioned to surpass platinum and become the most sought-after precious metal after gold and silver.