Investors have been flooding into precious metals.
The price of gold is up 28 percent in 2016, and the price of silver has increased 47 percent. One of the most popular gold ETFs, the SPDR Gold Shares Trust (GLD), has seen assets increase by 28 percent, or by more than US$20 billion, this year alone.
Regular Truewealth readers know precious metals are widely considered “safe havens” for investors – a form of insurance when financial markets go through periods of big uncertainty.
Palladium is found in the earth’s crust and is known for its high melting points, resistance to corrosion, and physical strength. It is about 15 times rarer than platinum and 30 times rarer than gold.
The price of palladium is up by about as much as gold this year. It’s lagged silver’s performance and is slightly behind platinum, which is up 31 percent in 2016 so far.
About 76 percent of world palladium production comes from South Africa and Russia. It’s typically produced as a by-product of platinum mining.
Like platinum, palladium’s most common use is for catalytic converters in vehicles, to help reduce harmful emissions. The automotive industry consumes approximately 80 percent of palladium’s global supply.
Palladium is also used in jewelry as a less expensive substitute for white gold and platinum. And because of its excellent conductivity, palladium is used in a variety of electronics.
Is there too much palladium, or too little?
As with all commodities, palladium prices depend on supply and demand – if there is more supply than demand, prices will fall. If there is too much demand and not enough supply, prices will rise.
Right now there’s more demand than supply. Forecasters predict that the supply deficit will grow from 800,000 ounces in 2015, to 1.35 million ounces (that’s about 14 percent of the total annual production) by the end of this year.
Global supply of palladium is expected to fall by 4 percent, with most of that due to a 5 percent drop in the amount mined. Demand, meanwhile, is expected to rise by 3 percent. Research firms Metals Focus and CPM Group both attribute this to an increase in automobile industry demand, thanks to a higher number of small car purchases in China. Also, low oil prices are helping boost truck sales in the U.S., and as trucks have large engines, more palladium is required to reduce the emissions they generate.
Metals Focus sees a palladium deficit remaining in place this year and next. But it expects this to be based on “strong gains in emerging market car demand, which many doubt given China’s slowdown.” This means that palladium prices, like just about every other commodity, depend on what’s happening in China. If China’s economy deteriorates, palladium’s price gains may be limited.
Palladium’s relationship with gold
The silver-to-gold and the platinum-to-gold ratios are good indicators of where the prices of each metal is headed.
For instance, when the silver-to-gold ratio hits 80 – which means that it takes 80 ounces of silver to buy one ounce of gold – silver prices usually climb. And this causes the ratio to fall back to normal, average levels of around 60. (Which is what happened earlier this year… as we predicted.)
The same is true with the platinum-to-gold ratio. This ratio states how much one ounce of platinum is worth compared to one ounce of gold. Historically, when the ratio falls below 1, it’s been a great time to buy platinum – because platinum is normally more expensive than gold. Right now, the ratio is at 0.85. So it’s likely that platinum prices will move higher.
The palladium-to-gold ratio, though, suggests that palladium is not as undervalued compared to gold as platinum or silver.
The ratio hit all-time highs in the early 2000s due to in part to intense demand from the auto industry, and falling supply. But its long-term average is 0.62.
In 2016, the ratio has been neither historically high like silver, nor historically low like platinum. At 0.52 (meaning one ounce of palladium is worth 0.52 ounces of gold), it’s about 15 percent below its long-term average. So, there is some room for growth from here, but the pattern isn’t as strong as the silver and platinum ratios were earlier this year for those metals. But, if the palladium-to-gold ratio keeps hovering around its average levels, palladium prices would probably follow gold higher.
Palladium is the Ringo Starr of precious metals
That there is expected to be too little palladium to meet demand this year and next may already be reflected in palladium prices. Prices have rebounded sharply since mid-January, when palladium’s 18-month bear market ended at a 5-year low of US$469 per ounce. Since then, the price has increased nearly 50 percent – jumping 9 percent in June alone.
So while the price for palladium is still set to rise, it is likely to be outperformed by gold, silver and platinum.
If you want to own some palladium anyway, the most popular palladium ETF is the ETFS Physical Palladium Shares (New York Stock Exchange; ticker: PALL). The fund owns physical palladium stored in vaults, which means you will gain exposure to movements in palladium spot prices. There is unfortunately no palladium ETF that trades in either Hong Kong or Singapore.