However, palladium has clearly stood out as a winner in the precious metals space this year. In fact, the only pure-play on the metal – ETF Securities Physical Palladium Shares (PALL) – has clearly outperformed the rest of the precious metal ETFs in the space, namely, gold ETF -SPDR Gold Trust (GLD), platinum ETF – ETFS Physical Platinum Shares (PPLT) and silver ETF – ETFS Silver Trust (SIVR).
Geopolitical tensions between Ukraine and Russia since the start of the year and a five-month long mine strike (which ended in June) in South Africa – the second biggest producer of Palladium – have resulted in the steepest supply shortfall of the metal in about 14 years. Notably, Russia is the biggest producer of palladium and accounts for 40% of its global supplies.
Though the metal had slipped to a low of $729 in October from its August peak of $911.50 due to the rebounding South African mining output, strong fundamentals have driven the metal back to $750 levels.
This is especially true as the demand for the metal remains robust and is expected to continue moving higher in the coming years. One of the biggest advantages of palladium over gold is that it has uses in some critical functions and as the demand for these functions grows, the prices of palladium will follow the course.
Moreover, with the Fed now close to the start of the rate tightening cycle and slowing growth in China (the largest consumer of gold), the demand for gold is expected to remain subdued for the next few years. Also, auto manufacturers are increasingly using palladium instead of the more expensive platinum, as production is scaled up.
On the other hand, palladium’s deficit is expected to be 1.62 million ounces this year, as per a presentation of London-based Johnson Matthey’s platinum-group metals report – the biggest shortfall in more than three decades.
Favorable Demand Supply Conditions
The majority of palladium is used in the automotive industry for manufacturing of catalytic converters to clean exhaust emissions. A recent surge in global car sales is expected to support the prices of the metal.
China is believed to have sold more than 20 million cars so far this year and sales in the U.S. have also been quite robust. 2014 is likely to be its best year for U.S. automobile sales since 2007. Moreover, lower gasoline prices are making car purchase more attractive.
Moreover, supply shortages are expected to continue into next year, given strengthening car demand in North America and China and stricter legislation in the latter requiring more of the metal to be used in devices that curb harmful emissions. In fact, light vehicle demand is expected to grow by about 4% per year, the majority of which is expected to come from China.
At the same time, the global market for the metal is expected to remain in deficit until at least 2016, as per Standard Bank. While global palladium deficit is expected to be 1.65 million ounces this year, it is believed to be 1.43 million ounces in 2015 and 1.88 million ounces in 2016.
Given the favorable demand supply conditions in the palladium market as compared to other precious metals, palladium is expected to be the best performer in the space. As such, investors seeking to get in on the palladium market can consider PALL which is a good choice to do so. The product has a favorable Zacks ETF Rank #2 or ‘Buy”, indicating that it is expected to outperform the broader markets.
PALL in Focus
Launched in January 2010, PALL is the only physically backed exchange traded product in the market and is a cost-effective and convenient way to invest in physical palladium. The fund manages an asset base of $439.9 million and charges slightly higher fees of 60 basis points.
The fund seeks to match the spot price of palladium, net of fees and expenses. PALL holds palladium bullion in plate or ingots kept in Zurich or London under the custody of JPMorgan Chase Bank.
The fund has been leading the precious metals space, rising by roughly 10.9% since the start of the year. Given some of the reasons outlined above, we definitely expect this trend to continue going forward.
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