How to Invest in Palladium

Guidance for Palladium Investing

While palladium and platinum are both classified as platinum group metals (PGMs), palladium is often overshadowed by platinum. That explains why many who have heard of palladium are unfamiliar with how to invest in it. But focus on the metal is growing, and several prominent market participants have made bullish forecasts for palladium — for example, Johnson Matthey (JM) recently predicted that there will be a supply deficit of the metal. There is thus no better time than the present to provide guidance for those interested in palladium investing.

Palladium is most widely used in the fabrication of catalytic converters. Many gasoline emissions systems rely almost wholly upon this metal. As diesel engines differ, palladium can only serve as a partial substitute for platinum in these emissions systems. However, given platinum’s higher cost, substitution levels have increased and the push for technology that allows further substitution continues. That means demand for the metal is tightly linked to automotive production and that palladium investors should keep abreast of developments in that industry.

Palladium production is largely concentrated in two countries: Russia and South Africa. As such, supply disruptions in either location can have a significant impact on the market. Palladium investors should therefore keep up to date on relevant developments in these countries. The labor strikes that occurred in South Africa this year provide a prime example of why that is necessary. Not only did the headlines knock around prices, but the resulting production losses played a role in JM’s forecast of a 915,000-ounce shortfall in 2012.

Once an individual understands what to watch, the next step is learning how to play.

Palladium mining stocks

Mining equities are one route for investing in palladium. The caveat, however, is that the largest producers are not pure-play palladium miners. The world’s top palladium producer, Norilsk Nickel (OTC Pink:NILSY) takes credit for over 40 percent of global supply. Anglo American Platinum (OTC Pink:AGPPY) is the second-largest producer, credited with over 16 percent of the global supply of palladium.

That is not to say that investors do not have any pure-play options. US-based Stillwater Mining (NYSE:SWC) claims to be largest palladium producer outside of Russia and South Africa, while North American Palladium (AMEX:PAL,TSX:PDL) produces the metal in Canada. An upside to these companies is that they are located in North America and thus add diversity to a highly concentrated business.

Palladium bullion

Some investors may want physical palladium, and there are certainly some options available to accommodate them. Individuals accustomed to collecting other metals should be prepared to find a range of choices that will likely seem comparatively small. Though interest appears to be growing, the limited number of palladium bullion options is considered a result of years of weak demand.

A common choice among the options currently available are 1-ounce bars, but 5-ounce, 10-ounce and 1-kilogram bars are also sold. Investors looking for palladium in the form of legal tender should consider the Canadian Maple Leaf, the only readily available government-issued palladium coin.

Previously issued palladium coins and palladium rounds from other mints may also be found for sale. Before purchasing these items, investors should carefully consider the circumstances for reselling them. As palladium is not as popular as some other types of bullion, it is best to make purchases from businesses that repurchase the metal that they sell.

Another consideration for investors in the market for palladium bullion is the likelihood that the price tag for many items will include a notable premium, or mark up above the spot price. Add to that other costs, such as shipping, handling, insurance, storage and the discounted bid, or buyback price, and it quickly becomes obvious that a significant price move will be needed to reap a profit on physical holdings. Therefore, positions built in palladium bullion should be considered long-term investments.

Palladium futures

Palladium is also traded in futures markets such as the NYMEX. That is an arena where investors can go to speculate on palladium prices or to acquire physical metal. In either case, involvement requires a significant investment and is associated with high levels of risk. Thus, it is best left to highly experienced investors.

Palladium ETFs

The happy medium between palladium mining stocks and physical palladium is a physically-backed palladium ETF, such as ETFS Physical Palladium Shares (NYSE:PALL).

ETF investment provides many of the features and benefits of palladium mining equities, but eliminates exposure to the risks associated with operating a mining company. Likewise, investing in an ETF provides exposure to metal prices, but removes the logistical and financial demands associated with owning physical metal.

Like other investment options, ETFs have costs. Investors should be aware that these may be higher than those associated with ETFs backed by other precious metals.

Palladium’s investment personality

Palladium’s fundamentals can be quite attractive even when its price is in a rut or an a downward track. Though palladium is a precious metal, it tends to trade differently than its peers, which include gold and silver. Those metals are commonly eyed for their safe haven appeal and may perform well even in bleak economic conditions. Palladium, which is considered a cyclical commodity, is not generally sought for protection. It tends to perform best when there is a prevalent appetite for risk. During times of economic turmoil or uncertainty, when investors are de-risking, it is common to find palladium prices caught up in negative sentiment — thus prices fall and ETF holdings decline.

 

Securities Disclosure: I, Michelle Smith, own shares of PALL.