Why Palladium

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Haven’t heard of palladium before? Don’t feel bad; I suspect most investors haven’t either.  Palladium is one of a group of six metals often referred to as PGM’s, which stands for Platinum Group Metals. This group includes the well-known platinum and the relatively obscure metals called rhodium, iridium, ruthenium and osmium.  Platinum is 15 times more rare than gold. All the platinum man has ever mined, for example, would fit into a 25-cubic-foot room. Palladium is more rare than platinum.

What these metals have in common is the ability to serve as a catalyst for chemical reactions, and a very high melting point (4000 degrees F). Not surprisingly, the biggest demand for both platinum and palladium comes from the global auto industry, which uses both in the catalytic converters necessary to meet increasingly stringent clean air requirements for the auto industry. In 2003, approximately 39% of total platinum demand came from the auto industry. The figures for palladium were even higher; roughly 58% of palladium demand was for auto-catalysts.

Since both are used to reduce auto emissions, platinum and palladium compete with one another on price. Automakers will use whichever of these two PGM’s gives them a bigger bang for their buck. In early 2001 for example, palladium made a high of $1,090 per ounce. At the same time, platinum was trading for $623 per ounce. As a result, the auto industry retooled their catalytic converters to use mostly platinum. This process of retooling takes some time, and prices of the two metals adjusted as the switch took place.

The impact is clearly visible in today’s prices. As of December 2009, palladium is trading for $390 per ounce, while platinum is trading for a whopping $1,500 per ounce. This imbalance will be corrected as automakers once again retool their production lines to accommodate the cheaper palladium. Palladium hit a low of $184 an ounce and appears to be headed significantly higher. At some point the gap between Platinum and Palladium will narrow.

Palladium has another advantage over platinum. A catalytic converter works only when hot, but 90% of tailpipe emissions occur before it heats up. To cut warm-up times, carmakers have moved the converter closer to the engine. Palladium, which is more heat tolerant than platinum, is better suited to this design.

Another factor to consider is that South Africa and Russia are the biggest suppliers of palladium and both have been dumping all they can produce on the market. Palladium is priced in dollars and today’s low prices mean not only are both nations getting paid less for their metal, but also the dollars recent drop means they are getting paid less in terms of real value. With a low palladium price and a declining dollar, how long will it be before these nations re-think their export policies, especially Russia, who accounts for almost 50% of annual global palladium supply? Russia holds the key to price and it wouldn’t be a surprise to see them hold back supply in order to raise prices.

If all that is not enough, perhaps the biggest demand for palladium could come from China, which is home to the fastest-growing automobile market in the world. In China last year, the number of cars on the road jumped by nearly 50%. Sales of domestically produced automobiles soared by 70%. The number of cars on the road is expected to increase at least 10% per year through the rest of the decade. The number could even be bigger because the Chinese are discovering new car financing. Imagine what will happen when 1.3 billion people discover no money down, five-year car loans!!!

At the same time, China has announced its intentions to impose more stringent emission standards which mean more and better catalytic converters and that means more platinum and palladium.

Bottom Line: Not only is palladium a play on its historic and unsustainable discount to platinum; it is also a play on China, and the global move toward more stringent air quality standards. Because it is priced in dollars, it is also a back-door play on a weaker dollar. Should these powerful trends continue, I would not be surprised to see Palladium rally back above the $1,000 per ounce level within the short to mid-term. With such a high and increasing demand for platinum around the world I don’t see platinum correcting much to the downside as palladium closes the gap.

Suggested Action: The easiest and safest way to benefit from a rising palladium price is to simply purchase one once palladium bars. The fabricator of these bars is Credit Susise or PAMP and can be purchased from AmeriGold (800 574-0047 or 720 870-8021).