Palladium as an Investment

Palladium has never practically served as money, but it is used as an investment. It is a precious metal, which has ISO currency codes of XPD and 964. Although palladium is often positively correlated with gold, it is much more widely used in the industry, so it behaves more like a commodity and it is more business cycle-sensitive than the yellow metal.

Palladium Market

Palladium is mainly traded on the New York Mercantile Exchange (Nymex) and London Platinum and Palladium Market, which is the most important over-the-counter marketplace for palladium. The size of the palladium market is much smaller than the gold or silver market, and it has recently been in deficit (the demand has been partially met by destocking), as one can see on the chart below.

Chart 1: Palladium demand (blue line, left axis, in thousands of ounces), palladium supply (yellow line, left axis, in thousands of ounces), and the net balance (green line, right axis, thousands of ounces) from 2002 to 2017 (the values for 2017 are projected).

Palladium demand (blue line, left axis, in thousands of ounces), palladium supply (yellow line, left axis, in thousands of ounces), and the net balance (green line, right axis, thousands of ounces) from 2002 to 2017 (the values for 2017 are projected)

Palladium Price

As in case of any precious metal or goods in general, the price of palladium is determined by supply and demand. However, the price of palladium is much more volatile than in case of gold, which results from a less liquid market. Therefore palladium is a much riskier investment. The London Metal Exchange, which works with the London Platinum and Palladium Market, sets the so-called LBMA Palladium Price twice a day, at 09:45 GMT and 14:00 GMT, which serves as a benchmark for pricing palladium. The current process of fixing is electronic – in December 2014 it replaced the previous fix set via telephone calls. The chart below shows historical palladium prices and their link to the gold prices.

Chart 2: The gold-to-palladium ratio (the price of gold divided by the price of palladium, red line, right axis), the price of gold (yellow line, left axis, Comex gold futures and London A.M. Fix) and the price of palladium (blue line, left axis, Nymex palladium futures and London fix) from 1977 to May 12, 2016.

The gold-to-palladium ratio, the price of gold and the price of palladium from 1977 to May 12, 2016

Palladium Investment Reasons and Drivers

Palladium is a precious metal, so it may be believed to be a safe-haven or inflation-hedge similar to gold. However, it is not completely true. There is often positive correlation between gold and palladium prices (especially in the long term), however, in times of economic uncertainty the price of palladium tends to decrease in relation to gold. The best example may be the Great Recession: in December 2008, the gold-to-palladium ratio surged, reaching almost 4.9 after the outburst of the financial crisis. That jump clearly shows that palladium is an industrial commodity rather than a safe-haven asset, such as gold. The gold-to-palladium ratio is thus a useful indicator of economic confidence among investors.

Since palladium is widely used for catalytic converters, its price largely depends on the situation in the automotive industry and vehicles production (especially in non-European markets, because there are more cars with gasoline engines), which depends on the general economic situation and the level of business activity. Actually, about 80 percent of palladium demand comes from the automotive industry. The rest of demand is generated by industry, jewelry, and investments.

Palladium prices are also affected by the price of platinum (its main substitute used in the automotive industry) and supply factors, such as the mining production, recycling and changes in relatively large palladium inventories. Since its production is concentrated in unstable emerging markets, the price of palladium is prone to price spikes due to production stoppages. The best example may be January 2001, when the price of palladium skyrocketed due to disruptions of the supply and intense demand from the upset automobile industry, reaching a high of almost $1,100, a level more than four times higher than the price of gold at the time.

In short, similarly to platinum, palladium is primarily an industrial metal with the dominant part of demand coming from automotive catalyst use. The demise of diesel engine may support some shift into gasoline cars, or hydrogen fuel cells vehicles, which is an upside risk. On the other hand, the looming electric car revolution is an important long-term threat for the palladium market, as electric vehicles do not need catalytic converters.

Palladium Investment Vehicles

There are several ways to invest in palladium, however, fewer than in the case of gold or silver. Investors can purchase bullion bars or coins, however, there is less diversity and the spreads are higher compared with gold or silver markets (the palladium market is less liquid). Available palladium coins include the Canadian Maple Leaf and the Chinese Panda, which are legal tenders. Investors can also purchase palladium exchange-traded products, such as ETFS Physical Palladium traded on the London Stock Exchange or ETFS Physical Palladium Shares trade on the New York Stock Exchange or palladium certificates to avoid the risks and costs associated with the transfer and storage of physical bullion. Investors can also invest in palladium via derivatives, such as futures and options traded on Nymex. Generally, investors should remember that the palladium market is rather illiquid; therefore, it is not always easy to exit from an investment at a satisfactory price. The indirect way to have exposure to the price of palladium is buying the shares in palladium mining companies, such as Norilsk Nickel, Anglo American Platinum, Impala Platinum, Lonmin, or Stillwater Mining Company. However, investors should remember that the production of palladium takes place mainly in the emerging markets, where stoppages often occur.

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