Palladium, a cheaper cousin of the same family of precious metals as platinum, may turn out to be the next hot commodity.
The metal, which is used in jewelry and in pollution-control devices in vehicles, has been the top performer in the precious metals space this year, beating both gold (GLD - ETF report) and platinum (PPLT - ETF report).
In fact, palladium prices recently hit the highest level in 13 years led by worries about dwindling supplies amid a five-month-old miners’ strike in South Africa.
At the height of the global financial crisis, palladium prices fell from a high of $558 per ounce in March 2008 to a low of $184 per ounce in December 2008, as the industrial demand for the metal collapsed.
This year, the average prices rose sharply to a multi-year high of $862 per ounce earlier this month from roughly $700 an ounce seen at the beginning of the year.
With the strike in South Africa now appearing to be coming to an end, investors might be left to wonder whether the party for this precious metal is now over. However, this might not be the case after all. (read: Two Precious Metal ETFs Set to Soar).
Though a temporary correction may be in the cards, if the strike indeed comes to an end, palladium prices would continue to shine for the forthcoming years. Let’s look at some of the reasons why the metal will continue to outperform.
Supply disruptions from South Africa and Russia, which together produce about 80% of the world’s palladium, turned to be the major catalyst for the metal this year.
Roughly 70,000 South African mining workers have been on strike since January, demanding higher wages. This led to the disruption of supplies.
However, a deal is believed to have been finally reached between the Association of Mine Workers and Construction and the top platinum/palladium producers in the nation.
Though the prolonged strike might finally come to an end, easing concerns about immediate supply threat, the overall global supply situation still looks bleak with the metal expected to be in short supply even if production resumes.
At the same time, geo-political tensions surrounding Russia’s (the largest producer of palladium) annexation of Crimea in March and the subsequent economic sanctions imposed on it hampered Russian exports (read: Palladium ETF Surging on Tensions in Ukraine).
Adding to the worries, the palladium stockpile held by the central bank of Russia has been dwindling over the past few years. In fact, rumors have been doing the rounds that the stockpiles could finish by the end of 2014.
Demand Remains Strong
Amid palladium’s dwindling supply concerns, the demand for this metal remains strong and is expected to continue moving higher in the coming years.
The metal has important industrial applications and is primarily used in the auto industry. Some of the metal’s unique properties make it a good choice to use in catalytic converters to clean exhaust emissions.
Auto manufacturers are increasingly substituting palladium in instead of the more expensive platinum, as global automakers boost their production. Global auto sales are expected to be up 5% this year.
Car sales in China, the world’s biggest auto market, are expected to expand by 11% this year thanks to the burgeoning Chinese middle class. Also, auto sales in the other BRIC nations – Brazil, Russia and India – are expected to remain robust this year. U.S. auto sales are expected to grow by 4% this year.
Also, demand for this metal is also benefiting from stringent global emission standards in the U.S. and other international locations (read: 3 Commodity ETFs Beating the Market in 2014).
Given dwindling supplies and rising demand, palladium should be on a roll this year. In fact, palladium is expected to remain strong until at least 2017, as per North America’s largest palladium producer, North American Palladium Ltd (PAL - Snapshot Report).
For investors seeking to get in on the palladium market, ETF Securities Physical Palladium Shares (PALL - ETF report) is a good choice to do so. The product has a favorable Zacks ETF Rank #2 or ‘Buy”, indicating that it is expected to outperform the broader markets.
PALL in Focus
Launched in January 2010, PALL is the only physically backed exchange traded product in the market and is a cost-effective and convenient way to invest in physical palladium. The fund manages an asset base of $515.3 million and charges slightly higher fees of 60 basis points.
The fund seeks to match the spot price of palladium, net of fees and expenses. PALL holds palladium bullion in plate or ingots kept in Zurich or London under the custody of JPMorgan Chase Bank (see: all the Precious Metals here).
The fund has been leading in the precious metals space, rising by roughly 15.5% since the start of the year, and given some of the reasons outlined above, we definitely expect this trend to continue.
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