🚗 Your Guide To Investing In Palladium, Basically Platinum’s Competitive Twin
Palladium, along with platinum, is one of 6 in the platinum group metals (PGMs) family. Discovered in 1803, it was initially used as a luxury metal for jewellery, before becoming an important part of reducing emissions in vehicles. Because metals in the PGM family share similar characteristics, they’re all basically like siblings, with platinum and palladium as the standout twins, competing with each other as the choice of metal for vehicles.
What Can It Do For You
🛡️ Protection. The same study that identified platinum as a safe haven also noted how palladium can act as as one when gold doesn’t. As such, adding palladium can help diversify your portfolio from stocks and bonds, and even from other precious metals. As a reminder, diversification is a way of preserving wealth in times of instability, inflation and market volatility.
💰 Profit. Palladium can definitely provide speculative returns for more aggressive investors. In just under four years, the price of palladium has almost quintupled (that’s 5x). It’s important to note that it also has a less liquid market with large price swings, so expect volatility. Similar to platinum, the majority of palladium demand is from industry, especially the auto industry, accounting for most of total demand. To be able to profit successfully from palladium is to know the supply and demand levels for both platinum & palladium. For example, the massive price spike in recent years was mainly due to a severe shortage of palladium.
What Affects Palladium Prices
There are several key factors that are involved in moving the price of palladium:
- 🇿🇦🇷🇺 South African & Russian Supply. These two countries produce roughly 75% of the world’s supply. Russian company Nornickel alone produces ~40% of the this. Disruptive events such as Russian export sanctions, or South African industrial action, can have an effect on the world’s supply of palladium.
- 🏭 Industrial Demand (Especially the Auto Industry). Unlike platinum, industrial demand for palladium accounts for almost all of total demand, about ~90–95%. The automotive industry accounts for ~80–85% alone. North America & China makes up half palladium demand for vehicles.
- 🔄 Substitution. When palladium gets too expensive, carmakers are more likely to substitute it out for cheaper metals in the PGM family, which can then lower demand, and therefore its price, and vice versa. Considering the record highs that palladium is at right now, it won’t be surprising if carmakers start to replace palladium with cheaper metals.
- ♻️ Recycling Scrap. What do you think happens to all that precious palladium in old cars destined to be scrapped? Yup, high palladium prices means scrappers salvage all kinds of metals (including palladium) and enters it back into supply. The amount has slowly been increasing over the years because not only have prices been increasing, but there are also more vehicles on the road worldwide. Also, old palladium jewellery also counts, but is minor compared to vehicles. More supply in the market can mean lower prices for the metal.
- 💰 Investment. Compared to other precious metals, palladium is a relatively new player in the investment field, especially since its first ETF was launched in the early 2000s. Nevertheless, there was investor demand for it. Nowadays, the market can be quite volatile since large traders representing investment funds can definitely move prices.
- 💵 US Dollar Strength. Since the benchmark for the pricing of palladium is in US dollars, a weaker dollar compared to other currencies (i.e. need more USD to buy other currencies) may incentivize foreign buyers to buy (since their currencies are worth more in dollars & so can buy more palladium) & drive up demand. It can also incentivize foreign producers like Nornickel to decrease supply since the dollar will convert less to the Russian rubles, meaning a decrease in revenue for the company.
Where Is Demand Coming From?
There are four main areas that drive demand:
- 💎 Jewellery. When it was first discovered, it was a popular & cheap alternative to platinum. Now, it’s one of several metals used to create white gold by combining it with gold. It’s also used in men’s wedding bands.
- 🚗 Auto Industry. Like platinum, the automotive industry represents most of the total demand for palladium, about ~80–85%. It competes with platinum to be used in catalytic converters, reducing vehicle emissions.
- 🏭 Other Industries & Tech. Like platinum, palladium is also used in a variety of tech and manufacturing industries. These include electronics, dentistry (fillings, crowns, dental bridges), chemical applications, and photographic printing.
- 💸 Private Investments. Palladium investments are relatively new compared to other precious metals. In fact, the first ETF launched in 2007. Other investments also include bars & coins, futures, options, and stocks.
The Case Against Palladium
Like other precious metals, palladium is not a productive asset. It doesn’t generate dividend payments and pays no interest, unlike stocks & bonds. Also, at the time of this writing, the price of palladium is at an all-time high, increasingly unsustainable and has yet to be corrected. Also, price fluctuations are much more volatile than other precious metals because it has a smaller market with lower liquidity (less people trading), and with large traders entering and exiting their positions, wildly swinging the price. Since the value of palladium relies heavily on industrial demand, mainly from the auto industry, any fluctuations in this, such as if carmakers start to replace palladium with platinum, & indeed, any disruptions with supply in Russia &/or South Africa, will be reflected in its price.
The Case For Palladium
Although palladium doesn’t provide dividends, it can offer speculative returns as it’s doing now because demand far exceeds supply. Years of a supply deficit has led to smaller palladium reserves. Stricter emissions regulations can lead to more palladium used per vehicle, driving up demand and potentially balancing out a fall in vehicle sales. Furthermore, palladium can be considered a safe haven asset during times of inflation due to the reasons outlined above regarding the strength of the US dollar. Similar to platinum, it can also serve as a diversification tool against silver & gold.
Popular Ways To Invest In Palladium — Pros/Cons of Each
There are many ways in which you can buy/invest in palladium. If you are still unsure about how any of these work, refer back to our basics newsletter for more information. Here are some of the more popular methods:
- Physical Palladium (Bullion Bars & Coins). You can buy and directly hold physical palladium bullion bars and/or coins. There’s no doubt to the ownership of these assets, and is reliable. However, you may want to consider storing in a secure storage facility rather than at home. Further, you may be faced with several fees — the cost to convert raw palladium into finished bars and coins tends to be passed on to you, as well as commission fees for the broker acting as the middleman. Selling it may also prove to be an issue as the broker may buy it back at below market prices. Alternatively, there are government-owned mints (if not available, reputable online precious metals dealers) where you can physically and/or digitally buy physical palladium, with the option to store at their vaults for a fee.
- Palladium ETFs. Palladium-backed Exchange-Traded Funds are traded on stock exchanges, so they’re very easy to buy and sell. However, there are no assurances that you actually own the physical metal. You also probably won’t be able to take delivery of your palladium. Depending on which broker you go with, you may be charged with trading commissions. ETFs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Whichever ETF you choose, be aware of the fine print — the risks and costs.
- Palladium Stocks. These are shares of mining companies that produce palladium. There are no fees, apart from trading commissions depending on your broker. They don’t necessarily follow the price of palladium since company profits and stock market movements need to be taken into account. Additionally, many of the mining companies produce and mine a range of other PGM metals, not just palladium. Because of all this, you’re exposed to a greater number of risks involving company profitability, exposure to price movements of other metals, etc. You may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what mines they have, the other metals they produce, and potential expansion plans.
- Palladium Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell palladium at a specified time in the future with an agreed-upon price. Because you are using a significant amount of borrowed money, even small price changes in palladium can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
Similar to the other precious metals, palladium can be an effective way to protect against inflation (when currencies fall in value) and diversification (even from the other precious metals as well) to reduce overall portfolio risk. That being said, investing in palladium can be more speculative since current prices at the time of this writing are unsustainable, driven heavily by supply deficits, industrial & investment demand.
🛡️ If you are considering adding palladium for protection/preservation purposes, you may want to consider doing dollar-cost averaging (regular investments over time) to build your palladium position so you can take advantage of the the times when prices are low. That being said, be wary of investing now since the price right now may be unsustainable.
💰 If you are considering adding palladium for speculation and profit, you may want to monitor the factors that affect palladium prices mentioned above, especially production levels & political climate in Russia & South Africa. Although the World Platinum Investment Council is more focused towards platinum, they do provide regular insight on other members of the PGM family, including Palladium. You may also want to consider performing some technical analysis on palladium’s price chart and to perhaps compare it with platinum to identify trends and patterns to help with your decision. Do monitor the fundamental drivers behind the price of palladium as current prices at the time of this writing may be unsustainable.
As always, if you are unsure, check in with a professional financial advisor before making any moves.