Palladium Proved Us Right Last Year, and is Headed to $3000

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Palladium is trading at $2541 as I write this, an all time high. I believe the price for palladium can go to $3000 without breaking a sweat. And I wouldn’t be surprised it if pulls platinum up with it on the way.

 

Palladium Historic Price
Source: Apmex

Palladium Proves Us Right

In February, I wrote an article on 3 reasons why the palladium market will get stronger. Those reasons include being the most flexible PGM used in automotive catalyst technology, being sought after increasingly in the jewelry sector, and palladium’s increasing role in biomedical applications.

3 Reasons Why the Palladium Market Will Get Stronger

At the time of the article, palladium was trading in the mid $1300’s, and we said the market for palladium would strengthen. We were more right than we could have possibly imagined, as the price has nearly doubled since then. And I don’t think it is going to stop for the same reasons I stated almost a year ago:

  • China’s auto industry is sucking up palladium as fast at it can be produced
  • People prefer palladium as the “other” component in white gold jewelry, whose popularity is at an all time high
  • Palladium is being used more in dentistry and medical applications

Palladium’s Future is Shiny

Bloomberg recently printed an article discussing the palladium market and echoes the reasons we posted above, last year.

Supply hasn’t responded to growing demand. Usage is increasing as governments, especially China’s, tighten regulations to crack down on pollution from vehicles, forcing automakers to increase the amount of precious metal they use. In Europe, consumers bought fewer diesel cars, which mostly use platinum, and instead chose gasoline-powered vehicles, which use palladium, following revelations that makers of diesel cars cheated on emissions tests.

And the Pharmaceutical Journal has a great piece on how palladium is being used in the medical and dental fields.

Palladium alloys are used extensively in dentistry, electrical circuitry, watch-making and the jewellery industry. It is prized for its catalytic properties and is an essential component in the catalytic convertors of motor vehicles. Palladium also has uses relevant to health care.

Palladium’s Journey to $3000

I do not see the rising price of palladium slowing down. Demand is strong and growing, and there are not a lot of equivalent substitutes for it in the market. Much like Rhodium which we just wrote about, Palladium is produced mostly in Russia and South Africa, which some supplies coming from Zimbabwe. Canada and the US also have palladium producing projects that contribute to world supply of this strategic industrial metal.

Palladium Supply Risk
Source: Royal Society of Chemistry

Platinum is the closest substitute for palladium in both jewelry and automotive catalytic applications, it’s two highest uses. But in each case, palladium simply works better. Palladium is a better catalyst at removing pollutants from automotive exhaust, and is a lighter metal as used in jewelry. So platinum cannot fill the entire supply gap that palladium is currently experiencing.

palladium supply deficit
Source: Metals Focus

Platinum is Severely Undervalued

That being said, palladium is priced more than 2.5x the price of platinum, which is about $970 as I write this. Even though platinum is not a perfect substitute, manufacturers will begin incorporating it into their designs to take advantage of its relatively cheap price compared to palladium.

I expect that it will be platinum’s year in 2020 and would not be surprised to see its price reach $1500. The overall supply gap for palladium will force more sales of its replacement, platinum. At the same time, the price disparity will also create strong headwinds for the world demand for platinum for the foreseeable future. This phenomenon could last at least a couple of years until two things happen.

This may continue until platinum’s price rises high enough to fill the palladium supply gap and provide a more reasonable disparity in prices than the 2.5x multiple we have now. I have positioned myself by buying physical platinum bars over a year ago and expect that position to pay off handsomely in the coming year.

Play The Trade Game – Buy an ETF

I am not a big fan of ETFs in the precious metal space because they  have no real redemption rights – they are simply price exposure vehicles to the trading price. However, in this case I am reversing position and recommending that shorter term traders consider putting one of the following platinum ETFs in their portfolio.

  • ETFS Physical Platinum Shares (PPLT)
  • GraniteShares Platinum Trust (PLTM)
  • iPath Series B Bloomberg Platinum Subindex Total Return ETN (PGM.B)

PPLT is by far the biggest fund with over $700 million in net assets, with an expense ratio of only 0.60%. That is very reasonable trade-off for investors that do not want to take physical delivery of the metal. The fund buys actual platinum bars and holds them in vaults, and helps investors avoid some exposure to the futures market.

GraniteShares Platinum Trust is only the second fund with physical exposure to the metal, but is much smaller with about $6 million in net assets. The fund has only been around for a little while. Since the beginning of 2019, the fund has had good performance returning 18.8% to investors, closely mirroring the returns on physical platinum over the same time frame.

The iPath Series B Bloomberg Platinum Subindex Total Return (PGM.B) fund is an ETN (exchange traded note). It tracks a single futures contract at a time, starting at 3 months to maturity and held to just before expiration. As a result, the price is cheaper than the spot price for platinum. As an ETN, the note’s taxes are lower. On the other hand, the note is traded thinly and can cost more to get out of the note. The fund is up about 14% since its launch in January of 2018.

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