Will Rhind, managing director of U.S. operations with ETF Securities,says that the automotive industry accounts for about 60% of worldwide demand for the metal. Other major buyers include the electronics industry (17%), jewelry (10%), dental (7%) and chemical industry at about 4%. Investment demand in the palladium market is roughly 5% of the metal’s trade, he estimates. On the supply side, Russia provides about 50% of annual palladium production followed by South Africa at 35%.
“Palladium is a primary ingredient in a lot of the industrial processes that we know and are familiar with--what you might call the old economy, such as autos,” said Rhind. “However, I think going forward, the exciting thing about a metal like palladium is that it’s right at the forefront of future technologies, and I think will very much be used as a metal of the future.”
The applications of the metal in developing technologies, he notes, includes its use in hydrogen fuel cells. Palladium and platinum are ingredients within hydrogen fuel cells and, also, in hydrogen storage and hydrogen production and purification facilities. “You also have new electronic materials, process catalysts and off-road (vehicle) catalysts,” Rhind explained.
A global economic recovery would bode well for palladium-demand. “Palladium’s price is much more driven by fundamental factors, unlike gold, which is largely a sort of a fear asset or a safe haven if you will,” said Stoyan Bojinov, an analyst with ETF Database in Chicago. “It’s found in consumer items, it’s used in capacitors, mobile phones, LCD TVs -- you name it. “
A little more than half the global supply of palladium goes into the manufacturing of catalytic converters, according to Bojinov. “In layman’s terms, it’s sort of the device that converts the toxic chemicals from the internal combustion engine into sort of non-toxic fumes. And, we’ve seen, obviously, a huge push across the auto industry for more efficient, more environmentally friendly cars,” he shared.
Thus, palladium is getting bolstered from the rebound in the auto industry very nicely. And; as the industry as a whole is moving in a more environmentally friendly direction, he says, palladium stands to benefit from that movement.
Clients who wish to invest in palladium can buy the metal but that involves storage. An easier-to-manage option is to buy a fund that invests in palladium miners, futures contracts or the physical asset. Each approach has pros and cons.
Tom Lydon, president of Global Trends Investments and editor of ETF Trends notes that mining stocks’ performance can differ significantly from the underlying metals’ performance.
Futures-based funds face multiple challenges, according to Bojinov. “They’re susceptible to the spot price of the metal itself,” he said. “They’re also influenced by the roll yield related to the slope of the futures curve and that sort of gets into the nitty gritty of futures-based products alone. And, lastly, they’re also affected by any interest earned on non-invested cash that the ETN has sitting on the side.”
Lydon points to several funds that hold physical palladium. ETF Securities’ Physical Precious Metals Basket Shares (GLTR) holds a basket of precious metals. One share of GLTR represents 0.006 ounces of palladium.
ETF Securities’ Physical White Metals Basket Shares (WITE) holds a basket of white metals, including silver, platinum and palladium. One share of WITE represents 0.008 ounces of palladium.
In the past 12 months, GLTR has risen roughly 22%, while the SPDR Gold ETF (GLD) is up about 28% and WITE has improved close to 10%.
For a pure play on physical palladium, ETF Securities’ Physical Palladium Shares (PALL) is the only U.S.-listed palladium ETF that provides 100% exposure to palladium. The funds’ holdings are stored in vaults in London and Zurich. PALL was launched on the NYSE in January 2010, says Rhind, and now holds about $700 million in assets.
PALL’s performance has been volatile, reflecting both the global macroeconomic outlook and factors unique to its investment market. Lydon says that since its inception, PALL has gained 46%, although it’s down almost 20% year-to-date. Despite the volatility, Bojinov believes investors should view palladium as a possible emerging markets play that would benefit from growth and increased auto and electronics demand from South America and Asia.
If your clients decide to buy PALL, Lydon suggests trading it against the 50-day or 200-day moving averages. Because you can’t group palladium with all the other metals, he says, investors may find that PALL trades differently from those assets. “From that standpoint, I would make sure to keep an eye on the specific trend of palladium as opposed to just buying it in the basket,” he advised.