Precious Metals Investing: Palladium Soars on Supply Squeeze and Auto Market Growth (PALL, PAL, SWC, UBS)
Most of the precious metals investing attention in 2010 focused on gold and silver. Investors flocked to the metals in search of safety from volatile stocks, rising inflation and a falling U.S. dollar.
And gold and silver delivered, rising 30% and 83%, respectively last year.
But another metal was also climbing at a rapid rate – even more than silver and gold – and is expected to keep going in the New Year.
This trend did not go unnoticed by the following reader, who responded to Money Morning’s silver articles by asking for more information on the other precious metal.
Excellent information on silver, now how about palladium?
Palladium was up more than silver in 2010, +96% versus +83%.
The new palladium exchange-traded fund (ETF) helped draw attention to this woefully undervalued metal that has no significant aboveground stashes, hoards, or inventories. It is so scarce the coin and bullion dealers don’t even have any in quantity. Perhaps the Russians have unreported stashes? But that is about it globally.
Palladium, platinum’s less expensive alternative, led the precious metals price surge in 2010 to rise 96.77%. Now in the second week of 2011, it’s hitting its highest level since March 2001 when it peaked at $1,125.
Palladium for March delivery has climbed 8% this week so far and yesterday (Thursday) climbed as high as $825.10 an ounce in trading on the New York Mercantile Exchange. Some analysts think a continued economic recovery and strengthening automobile market will push the metal another 24% this year, above $1,000 an ounce for the first time since 2001.
While gold and silver were the talk of 2010, many are betting on palladium to be this year’s star.
“We continue to expect both platinum and palladium to outperform gold over the course of this year,” UBS AG (NYSE:UBS) analyst Edel Tully wrote in a report yesterday.
Money Morning Contributing Editor Peter Krauth said palladium prices should rise as long as economic recovery continues.
“There is serious potential for higher palladium prices in 2011,” said Krauth. “It’s certainly much more of an industrial metal than a precious metal, as most of its use is commercial (a lot in automobile anti-pollution), rather than for investment or jewelry. Because of that, its continued rise will depend much more on a sustained economic growth.”
Besides investor support for commodities, one of the key factors helping palladium’s price surge in the New Year is the U.S. auto market’s continued recovery and increasing demand from emerging markets like China and India. Palladium is used in catalytic converters and an increase in auto manufacturing will push up the metal’s price.
“Car sales expansion will boost palladium as the industry is the biggest consumer of the metal,” Bruce Ikemizu, the head of commodity trading in Japan at Standard Bank PLC, told Bloomberg.
China’s vehicle sales are expected to climb 10% to 15% this year after a 32% jump in 2010, according to the China Association of Automobile Manufacturers.
While an auto market rebound will support both palladium and platinum, palladium will benefit more because it’s favored in gasoline-powered vehicles popular in the United States and emerging markets.
Rising palladium demand will be met with supply constraints, placing further upward pressure on the metal’s price. South Africa, the world’s second biggest palladium producer, will meet production challenges due to poor mining conditions. Russia, the world’s leader in palladium production, is said to be running low on reserves.
“Supply may become unstable as stockpiles of the metal held by the Russian government may have almost depleted,” said Standard Bank’s Ikemizu. “Russia is said to be completing palladium sales from the state reserves.”
Russia’s palladium supply increased 2.1% last year to 3.71 million ounces, which is 52% of the metal’s global supply, according to London-based refiner Johnson Matthey PLC. Industry experts expect Russia’s state depository to sell small amounts of palladium in 2011, and then exit the market in 2012.
Global palladium supply exceeded demand by only 45,000 ounces last year, the lowest amount since a shortage in 2000.
Palladium stocks have enjoyed the precious metal’s demand and are performing solidly so far this year.
The “new palladium exchange-traded fund” referenced by Money Morning reader “DK” was launched by ETF Securities Jan. 15, 2010. The ETFS Physical Palladium Shares (NYSE:PALL) is the first U.S.-traded physically backed ETF in palladium, and has risen 86% in the past year. Money Morning Contributing Editor Shah Gilani pointed out this ETF for investors in his U.S. stock market forecast for 2011.
North American Palladium Ltd. (AMEX:PAL), a precious metals company with mining assets in Canada, has climbed 59% in the past three months.
Stillwater Mining Company (NYSE:SWC) is up 25% since October. It’s the primary palladium producer in the United States, according to its Web site, and operates two mines in Montana. It has operations in the Johns-Manville Reef, the richest known palladium deposit being mined currently in the world.
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[Editor's Note: Peter Krauth, a frequent contributor to Money Morning, is the editor of the Global Resource Alert, a private advisory service that focuses on precious metals, energy commodities and other natural-resource-related topics. Krauth spent two decades as a market analyst and portfolio advisor, and has covered all the commodities sectors, including gold, silver, coal, alternative energy and agriculture. He even makes his home in Canada - to be closer to the action. And several of his recent predictions have generated a genuine Internet buzz.
To find out more about commodities, or the Global Resource Alert, please click here.]