This article was originally published in January of this year…
Palladium started the year on a positive note, with futures prices already up by more than 10% after hefty gains in the last three years. Better yet, analysts are upbeat about the long-term prospects for the metal.
“The biggest driver for palladium’s recent success comes from the ongoing supply deficit, creating a very tight physical market,” says Maxwell Gold, director of investment strategy at Aberdeen Standard Investments.
The metal had record automotive demand of 8.5 million ounces last year, up from 5.8 million in 2010, and “coupled with constrained mine production growth, this has resulted in palladium demand outpacing global supply over much of this decade,” according to a recent report from precious metals consulting firm Metals Focus. Palladium is mostly used in pollution-controlling catalytic converters on gasoline-powered vehicles.
The March futures contract for palladium settled at a record $1,318.50 an ounce on Wednesday, its eighth record settlement in nine sessions. In 2018, futures prices climbed nearly 13%. The impressive rise has made the metal more valuable than gold for the first time in over 16 years. On Wednesday, palladium futures settled with a nearly $25 premium over gold futures at $1,293.80 an ounce. Palladium spot prices topped spot prices for gold on Dec. 4 for the first time since Oct. 23, 2002, according to Dow Jones Market Data.
Energy markets are closely watching trade negotiations between the “Palladium and gold are both rare and therefore valuable,” says R. Michael Jones, chief executive of Platinum Group Metals (ticker: PLG). But “palladium is more valuable than gold as it is rarer,” he notes.
“There are dozens of gold mines around the world,” Jones says, while “there are only two primary palladium mines in the world and two new mines in South Africa in development.”
But as palladium trades a few dollars above gold, it now costs more than $500 an ounce above platinum, whose futures prices settled at $807.90 on Wednesday. Investors can access palladium via futures contracts, as well as the physical metal and exchange-traded funds such as the Aberdeen Standard Physical Palladium Shares exchange-traded fund (PALL) and stocks of miners, including its biggest producer Norilsk Nickel (NILSY).
Platinum’s much cheaper price has raised the possibility that auto makers will start looking to replace palladium in catalytic converters with platinum. The opposite happened when palladium was the cheaper metal. Palladium prices were consistently lower than platinum’s from about 2001 to 2017. “We are told by the makers and buyers of [automotive catalytic converters] that it would take a $500 spread in platinum and palladium for at least two years to have the beginnings of switching,” Jones says.
And in a recent report, John Ciampaglia, chief executive of Sprott Asset Management, said that while auto makers may return to using platinum if palladium’s price continues to outpace platinum’s, analysts have said it would take auto makers at least 18 to 24 months to make the change.
Switching isn’t quite as easy as it sounds. “There are manufacturing, engineering, and supply-chain costs involved in changing the chemistry of automotive catalytic converters from palladium back to platinum,” says Shree Kargutkar, portfolio manager at Sprott.
“As palladium’s momentum continues higher, it runs the risk of profit-taking and speculative activity weighing on prices,” Gold says. Given that the metal is “very volatile, I wouldn’t be surprised to see a significant pullback of 10% or more, but this would be an attractive entry point more than a reason to abandon ship.”
Since the original article came out in January of this year, Palladium is now trading around $1602 per ounce, up over 65% in just the last 6 months. With CDM’s help, you can acquire and store your palladium within your qualified retirement accounts. Request our guide and we will show you how.