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Why Palladium May Be This Year's Gold


The auto industry is driving demand, but limited availability constricts supply.

Precious metals are rare, naturally occurring elements with a high economic value. Gold and silver derive their value from this historical use as coinage, but others like palladium have the dual benefit of being rare and useful in commercial applications. Even better, many of these applications are projected to rapidly grow, resulting in higher demand.

Auto Industry Drives Demand

Global automobile demand is expected to continue rising by 6% in 2012 and 2013, which is higher than its 4% rise in 2011, according to Nomura analysts. While the US has experienced a strong rebound, many emerging markets have also contributed to global growth. For instance, Thailand and Indonesia have both seen strong growth amid expanding middle class incomes.

Palladium is primarily used in automobile catalytic converters, which convert the toxic byproducts of combustion into more innocuous chemicals. While most catalytic converters utilize platinum, there are high costs and some unintended reactions involved. Many manufactures therefore use a combination of other elements, including palladium as an oxidation catalyst.

Many analysts expect platinum demand for auto catalysts to rise 100,000 ounces this year, which suggests a similar rise for palladium, since they are both commonly used in the same application. When coupled with a tighter supply, these dynamics could lead to higher prices throughout 2013, according to many industry experts.

Limited Availability Constricts Supply

Palladium is primarily mined in only a handful of different countries. South Africa dominates the supply of platinum group metals, accounting for nearly 80% of global production. Russia has also made a name for itself as being a major provider of this commodity through out the years. The gap between supply and demand is expected to come in at nearly 915,000 troy ounces in 2012, after a 1.255 million surplus in 2011, as production fell 6% around the world.

Supply concerns remain in both Russia and South Africa, with some analysts projecting an 876,000-ounce deficit for 2013. While palladium from Russia's stockpile has helped even out demand in the past, nobody knows the size of those inventories and much of the stocks could be depleted, according to analysis based on trade data from Switzerland.

The limited supply has led to higher prices for the commodity, especially given the increased demand from the auto industry. Looking ahead, many analysts see 2013's average prices that are steadily to sharply higher than they were in December 2012, particularly during the second half of 2013 when the global economy is expected to gain momentum.

Investing in Palladium Futures
The most direct way to invest in palladium is by purchasing palladium commodity futures on the Chicago Mercantile Exchange (CME) under the symbol "PA," with expiration dates moving out approximately six months. These contracts trade in 100 troy ounce increments with a minimum fluctuation of $0.05 per troy ounce

These contracts can be traded using most commodity brokers, but investors should note that the contracts are physically delivered, if held through expiration. Trading is conducted over 15 months, beginning with the current month and the next two calendar months before moving into the quarterly cycle of March, June, September, and December.

Palladium futures are hedging tools for commercial producers and users of the metal, while also providing global price discovery and opportunities for diversification.
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