Martin Hutchinson: Even gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) investors need to diversify. That’s why investing in precious metals means more than simply buying the “barbaric relics” that have served as money in the past.
Aside from silver and gold, there are two other ways to invest in precious metals that deserve your attention – both of which have important industrial uses.
They are palladium and platinum.
And for today’s investors, there’s a small window of opportunity to get in on both of them before prices really start to take off
As commodities and mining expert Peter Krauth recently explained, “soon virtually every substance vital to modern life will become enormously expensive and profitable for investors who know how to play it.”
Most assuredly, palladium and platinum will follow along every step of the way.
Both are essential industrial metals-especially vital to the automobile industry.
Palladium and Platinum: The Other Precious Metals
Otherwise known as element 46, Palladium is one of the platinum group of metals which share the characteristics of being chemically inert and physically heavy.
Palladium is industrially important because of its ability to absorb up to 900 times its own weight of hydrogen gas, making it ideal for use in automobile catalytic converters.
Because of this use, its price peaked in 2000 at over $1,100 an ounce, at a time when gold was selling for around $250 an ounce. Currently its price is around $690 an ounce, which is much cheaper than platinum.
That’s why the automotive market is switching back to it. As much as 25% palladium can be substituted for platinum in catalytic converters, and that proportion has been increased to 50% in the laboratory.
Platinum, element number 78, is much heavier than palladium, checking in 20 times as heavy as water.
As with palladium, its primary use is in catalytic converters, but it also has uses in jewelry and electronics.
The price of platinum has traditionally been higher than gold’s, and it soared to over $2,000 an ounce in 2008; currently it trades around $1,640, or just below gold.
Naturally, with its heavy industrial use, its price tends to rise sharply whenever the automotive industry is expanding rapidly. That’s exactly the case in emerging markets like China and India where economic growth has produced millions of new drivers in the last decade.
Although palladium is twice as common as gold, only 200 metric tons of palladium and platinum are produced annually, less than a tenth of annual gold production.
Palladium’s principal producers are Russia and South Africa, both with about 40% of the market, while 80% of the world’s platinum comes from South Africa.
For investors interested in mining companies, the principal challenge is to find companies with substantial operations outside Russia or South Africa.
Both those countries have a history of poor observance of contracts, so mines in those countries are in severe danger of having their contracts renegotiated or even suffering expropriation.
Investing in Precious Metals With Miners and ETFs
However, in both cases, interesting Western mining opportunities exist. What’s more is that
both palladium and platinum have metal ETFs.
The best exchange traded funds include:
- ETFS Physical Palladium Shares (NYSEARCA:PALL) has net assets of $530 million and an expense ratio of 0.53%. Its price originally tracked 0.1 ounces of palladium at its formation in January 2010, but it now appears to be about 7% short of this.
- ETFS Physical Platinum Shares (NYSEARCA:PPLT) has net assets of $886 million and an expense ratio of 0.53%. At its inception in January 2010 its price tracked 0.1 ounces of platinum, but it is now about 3% short of this.
For mining companies, there are two with North American operations that merit notice:
- Stillwater Platinum (NYSE:SWC) operates two platinum group metals mines in Montana and has a third development project in Ontario, Canada. It’s currently trading with a 9.7 P/E and is 1.8 times net asset value, with a market capitalization of $1.46 billion. In 2011 it mined 518,000 ounces of platinum group metals (palladium 399,000 ounces, platinum 119,000 ounces) compared with 485,000 ounces in 2010; it anticipates output of around 500,000 ounces in 2012.
- North American Palladium (NYSE:PAL) operates a palladium mine in Ontario and has a gold mining project that is expected to come on stream in the second quarter of 2012. In 2011 it produced 147,000 ounces of palladium at a cost of $448 an ounce, and made a $16 million loss before $49 million of write-off from a gold mine that proved uneconomic. PAL expects platinum production to increase to 250,000 ounces by 2015, at a cash cost of $250 per ounce. In addition the gold mine is expected to produce 30,000 ounces per annum at cash cost of $1,150. PAL’s market capitalization is currently $440 million, and its operations are especially leveraged to the prices of palladium and gold.
Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of the Financial Services Volunteer Corps, Hutchinson became an advisor to the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.
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