An area where many investors make a mistake is in portfolio diversification. I’ve mentioned this many times in the past, but it bears repeating: never place all your money in one company or asset class.
While the precious metals index has declined, not all of the components have had the same performance or even the same level of fundamental developments. While gold is down 18% this year, and silver has dropped by 26%, platinum is only down 5.3%, and palladium is up 4.7%.
As I’ve mentioned in a previous article, investors should clearly look at adding platinum and palladium to their well-diversified portfolios if they are interested in having some exposure to the precious metals sector. The reason is that demand for both platinum and palladium is set to increase from industrial use. Investors should diversify part of their portfolios away from the traditional precious metals of silver and gold and into both platinum and palladium if they still wanted exposure to this sector.
Note that I’m referring to exposure to the precious metals sector directly through the commodities themselves, not the mining stocks for platinum and palladium. This is because the vast majority of platinum mining stocks are located in South Africa, and much of the platinum supply comes from Russia. Mining stocks in these precious metals are facing increasing costs, significant labor problems including strikes, and potentially stricter regulations.
Precious metals mining stocks in South Africa have suffered greatly over the past year, and many companies are now closing mines or reducing production to try to regain profitability. While these problems are bad news for mining stocks, they’re positive for the precious metals themselves, as this supply reduction comes on the heels of increased demand.
Compared to gold, the vast majority of platinum and palladium is used for industrial purposes. This means that industrial users need to purchase these precious metals to maintain sales, as opposed to an investor simply buying gold for no end use. Industrial use is set to continue, especially as the automotive industry that uses such a large amount is likely to see continued strength throughout this year and the next.
As most people know, a large percentage of platinum and palladium is used for vehicles in reducing emissions. These precious metals are crucial for automobile production, and as most readers should be aware, car sales are soaring. This is not a short-term blip, car sales will continue to be strong in the U.S. going into next year, China will see a huge level of demand over the next decade, and even the European Union reported an increase in car sales for April, the first positive reading in almost two years.
With recent talk that the Federal Reserve might begin reducing stimulus sooner rather than later, this will clearly impact gold investors. Even Federal Reserve Bank of Chicago President Charles Evans, who is one of the biggest supporters of the current easy monetary policy, has recently stated that the economy has improved quite a bit and is close to escaping velocity in 2014—and dovish members of the central bank agree. (Source: Jamrisko, M. and Ito, A., “Fed’s Evans Says Economy Has Been ‘Improving Quite a Lot,’” Bloomberg, May 20, 2013.)
I think it’s a good idea to diversify one’s precious metals investments into platinum and palladium, because these precious metals will continue to have strong relative strength versus precious metals that are purely for wealth preservation. Certainly, one could make a case for having some funds throughout the precious metals sector, and that decision must be made through each individual’s own due diligence.
This article is brought to you courtesy of Sasha Cekerevac from Investment Contrarians.
Related: ETFS Physical Palladium Shares (NYSEARCA:PALL), ETFS Physical Platinum Shares (NYSEARCA:PPLT)