The majority of precious metals are at record-highs. Platinum, gold as well as silver are soaring due to the excessive liquidity floating around the planet. Money supply growth is rising fast in most nations today and this sector has been the biggest beneficiary.
Despite the ongoing bull-market in precious metals, palladium has (so far) not joined in the party and here lies a fantastic investment opportunity. Palladium is a precious metal, one of the platinum group metals (PGM), which are typically are found in ore deposits.
In my opinion, palladium is getting ready to march ahead. Palladium's bear-market, which lasted roughly five years, is now over and a new bull-market is underway.
In order to make profitable investment decisions, it always pays to study the primary drivers behind prices - supply and demand. In the case of palladium, supply and demand dynamics are getting better and this should translate into much higher prices.
On the supply side, Russia is by far the world's largest producer of palladium, followed by South Africa and North America. A few years ago, Russia caused a supply shock by declaring that it would not sell palladium in the following year. This announcement caused prices to spike and palladium peaked in early 2001 at $1,050/ounce.
On the demand side, catalytic converters for automobiles constitute roughly 50% of palladium's use while jewellery, electronics and dental-work make up the rest.
A catalytic converter is a metallic device, which is implanted in automobiles to reduce harmful carbon emissions. Depending on prices and availability, auto manufacturers often switch between palladium and platinum as both can be used to build catalytic converters. One thing is for sure, the demand for catalytic converters can only go up from here as the 2.4 billion Chinese and Indians start buying more automobiles as they become more affluent.
As palladium prices jumped higher on the Russian news five years ago, auto manufacturers dumped expensive palladium in favour of platinum, which was still relatively cheap. As demand for palladium dried up, it caused a severe decline in prices (as falling demand always does) and the metal went down to $170/ounce recorded earlier this year. In other words, the price of palladium fell by an astronomical 85% from its peak! On the other hand, as the demand for platinum grew bigger, its price headed north. Today, platinum trades above $1,000/ounce compared to palladium, which is much cheaper at $270/ounce. So, the situation has now reversed in favour of palladium and (once again) auto manufacturers are starting to choose the cheaper substitute, which will push palladium's demand, hence price to appreciate in the future.
Moreover, palladium's demand for white-metal jewellery is also rising rapidly in China where the growing middle class is embracing this high purity and relatively affordable metal. In fact, the manufacture of jewellery has now become the second biggest application for palladium as demand surges to 1.43 million ounces this year - a result of a more than 70% increase in the production of palladium jewellery in China!
Source: Johnson Matthey
To put things in perspective, last year's annual supply of palladium was 7.9 million ounces whereas total demand came in at 6.5 million ounces. This created a massive surplus causing prices to drop below $200/ounce. This year, demand for palladium is forecast to rise by 400,000 ounces to 6.9 million ounces. Most of this growth will be due to a rise in purchases of the metal for jewellery in China. Supply of palladium will drop however by an estimated 370,000 ounces to 7.5 million ounces. The previous year's surplus will therefore be cut by more than 50% to roughly 600.000 ounces.
Markets forecast the future and tend to move in anticipation of the news. Accordingly, palladium has already started climbing and has appreciated by almost 30% over the past month alone! So, you can see that favourable shifts in supply and demand have started the new bull-market in palladium, which is still in its early days. Other precious metals such as gold, platinum and silver are at record-highs whereas palladium is still trading at a 75% discount compared to its peak recorded in 2001. This situation is unsustainable and palladium should play "catch up" over the months ahead. If my assessment is correct, the price of palladium could rise significantly and the metal may turn out to be the best performing investment you ever made.
Experienced investors can consider investing in long-dated futures contracts or you can buy physical palladium bullion. Another way to participate is by investing in shares of palladium producing companies, which will go through the roof as palladium's bull-market gathers steam. Most of such shares went down dramatically during palladium's four-year bear-market and have only started rising. My advice is to select companies, which have a large quantity of palladium reserves in their mines. Their stock price should rise exponentially as palladium becomes more expensive. Finally, this is a generational bull-market in commodities, which has a long way to go.
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