Palladium is a precious metal mined and produced globally with several industrial uses.
Even though investor demand is small, the price of palladium has been outperforming other metals in recent years.
Investors looking to diversify investments or seeking an inflation hedge against the U.S. dollar may be interested in adding palladium to their portfolio. Here are a few things to know:
— What is palladium?
— Ways to invest in precious metal.
— Palladium’s historical performance.
What Is Palladium?
Palladium is a precious metal, often compared with platinum, which has various applications in the chemical and electrical industries, jewelry and dental fields.
The precious metal is mainly found in Russia and South Africa, with some deposits located in the U.S. and Canada. There are only a handful of companies that manage the production and manufacturing of precious metal globally.
Palladium’s demand mainly comes from its use in the automotive sector in its production of the catalytic converter, an exhaust emission control device that minimizes pollutants in cars. Despite the setback the automotive industry has seen as a result of the pandemic, the supply of palladium is on a decline amid continued demand in the global auto market.
“There has been consistent growth for palladium in the past four years driven by increased demand due to increasingly stricter pollution laws, meaning manufacturers are having to increase the amount of palladium used in each catalytic converter,” says Sukhi Jutla, co-founder and chief operating officer at MarketOrders, a London-based business-to-business platform that connects gold jewelry retailers to suppliers and manufacturers of gold-related items around the globe.
With environmental standards increasing, the need for the precious metal may persist. Massive automobile markets such as China, which has a national air pollution action plan to regulate emissions, and the U.S., which has taken federal action to address climate change concerns, dominate the auto industry in global sales annually. This means these automobile devices will be in high demand, as well as their fundamental component: palladium.
Ways to Invest in Palladium
Investors who are considering commodity investments to hedge against inflation or to diversify can turn to palladium to reduce portfolio risk, experts say.
Precious metals should be part of a well-diversified portfolio says Marc Lichtenfeld, chief income strategist at The Oxford Club in West Palm Beach, Florida.
“Just like you’d have various types of assets in a diversified portfolio, investors can diversify within asset classes. Many investors think only of gold and silver when it comes to precious metals, but palladium and other metals can add to that diversification,” he explains.
That said, the palladium market is small. There are a handful of companies that offer exposure to palladium in addition to platinum, gold and metals.
North American Palladium, recently acquired by Impala Platinum Holdings to form Impala Canada, is one of the world’s leading producers of palladium. The company’s focus is growing palladium production through its underground mining and surface operations in Canada and South Africa.
Sibanye-Stillwater ADR ( SBSW) is another company focused on mining palladium and other metals, with operations in the U.S. and South Africa. It’s the world’s second-largest producer of palladium. The company is developing relationships with exploration companies to further its mining efforts and investing in innovative technologies to make mining more efficient and sustainable. SBSW has a market cap of $8.33 billion and its stock is up 14.5% year to date, with a substantial gain in the last three months.
There are few palladium exchange-traded fund options in the market, which makes it difficult for retail investors to access.
Investors wanting direct exposure to palladium will look to the Aberdeen Standard Physical Palladium Shares ETF ( PALL). This ETF is the most popular when it comes to tracking exposure to palladium. It’s a physically backed fund that has palladium holdings in London and Zurich. PALL’s market value is roughly $210, with an expense ratio of 0.6% and a 10-year annualized return, as of Aug. 31, of 15%. PALL has a large “bid ask” spread, but it’s an option to hold equity and offers pure exposure to the precious metal.
Palladium prices are trending higher than other metals such as gold — but there is uncertainty surrounding the metal’s market performance given palladium’s tight supply and the volatility of its price this year.
“2020 has been an interesting test case for palladium, which over the past four years has multiplied its value fourfold. Despite making record highs of over $2,700 per (troy) ounce in February this year, palladium has been unable to recover this previous peak, suggesting trend exhaustion,” says Ryan Giannotto, director of research at GraniteShares, an ETF provider in New York City.
With the automotive sector taking a hit in car sales worldwide, resulting in lower production, the price of palladium has been negatively impacted.
Palladium, which currently stands around $2,340 per troy ounce, has experienced growth within the last year. In September 2019, the price of the precious metal was about $1,656 per troy ounce.
The production of palladium is low and the supply of the metal is scarce. This is because it’s mined as a byproduct of other metals like platinum and nickel, so it moves in conjunction with these other metals, reducing its production. Compared with its competitor and substitute, platinum, palladium is facing continued price tension.
“By the point of comparison, platinum has rallied over 50% from its market lows and has yet to reach even half its historic market highs,” Giannotto says. “Given that platinum and palladium are direct substitutes in the industrial market, platinum may very well represent the value angle on precious metals.”
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