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What Lies Ahead of the Decade-Best Commodity ETF Palladium?

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After a surge in 2019, palladium price momentum has shown no signs of a slowdown in 2020. The rally has mainly been backed by growing global demand and stagnating supply. “There are few well-established palladium mines” while demand has been on the rise on increased consumption of gasoline engines.Physical Palladium ETF (PALL - Free Report) is up 21.1% this year. In fact, investors should note that the fund has added 174.2% in the past decade.

The automotive industry, mainly involved in the manufacturing of catalytic converters for vehicles, is a key driver for palladium. Stringent emission control norms have been fueling demand for Palladium-using, petrol-fueled cars as governments around the world look to fight climate change. 

Though the metal started the year 2020 on a high note, COVID-induced decline in global car sales and lockdowns hit it hard. “According to a recent palladium price outlook by Heraeus Precious Metals, overall demand is set to contract by 16% to around 252 tons”, as quoted on Capital.com. Still, the metal recovered its loss and moved nearer to the pre-pandemic highs.

What Lies Ahead?

China, the largest auto market, intends to necessitate each vehicle to contain more palladium, platinum and rhodium. Since the signing of the U.S.-China phase-one trade deal and economic recovery from the coronavirus-related slump has brightened up the growth prospect in China, palladium had every reason to outperform ahead.

In fact, car sales in Europe have been suppressed, but the scenario is different in China. Moreover, China is the world's second-largest consumer of Palladium (after the United States) as the country does not produce it, meaning import demand will be high.

Secondly, supply is still a concern. Lockdowns in some palladium-exporting countries have caused the supply crunch. “In South Africa, production dropped by a whopping 24%, while in North America, it decreased by 3%. At the same time, palladium mining operations were virtually unaffected in Russia and Zimbabwe. In total, according to Norilsk Nickel (the world's largest producer, based in Russia), global supply in 2020 will be 14% lower than in 2019,” as quoted on Capital.com.

Russia’s biggest mining company Norilsk Nickel expects palladium supply shortfall to show up again in early 2021. The chances of a weaker greenback amid massive Fed policy easing will also favor commodity investing as commodities are priced in the U.S. dollar (read: The Best Currency ETF of 2020 Will Surprise You).

Palladium also has a relatively cheaper valuation this year as it lagged silver (industrial metal plus safe asset) and gold (purely safe asset), both of which enjoy a certain level of safe-haven status. As a result, risk-on sentiments should boost a purely industrial metal like palladium in 2021.

Against this backdrop, investors should have a look at the palladium ETF in detail (see all Precious Metals ETFs here).

PALL in Focus

This ETF is designed to track the price of Palladium Bullion. The fund has amassed about $370.7 million in assets and charges 60 bps in fees.

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