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4 Reasons You Might Invest in Palladium

Investors should consider purchasing palladium for the following reasons:

  1. Bet on Automobile Demand
  2. Bet on Supply Constraints
  3. Bet on Investment Demand
  4. Portfolio Diversification

Is Palladium a Safe Bet Because of the Auto Industry?

The automobile market is the most critical industry for palladium.

Investing in the commodity is a way to bet on surging demand for automobiles in emerging market countries such as China and India.

BYD Qin Hybrid Vehicle in China via Wikimedia
BYD Qin Hybrid Vehicle in China via Wikimedia

Similarly, the low-interest rate environment in the United States and Europe should bode well for the automobile industry. Low rates mean affordable access to credit markets. Since most buyers finance automobile purchases, rates play an important role in determining demand.

As long as rates remain near historically low levels, demand for cars and the catalytic converters that go in them should remain strong.

Betting on Supply Constraints

With three-quarters of the global supply of palladium coming from two countries, there is the real possibility for supply shocks in palladium production.

The United States is a large importer of palladium and has a recent history of tensions with Russia. Should Russia curtail its exports of palladium, the price of the metal could soar.

Similarly, labor disputes in South Africa or new mining regulations could lead to supply disruptions and higher prices.

Speculating on Investment Demand

Investment products focused on palladium are relatively new compared to other precious metals such as gold and silver.

As more traders discover the favorable supply/demand fundamentals for this commodity, palladium prices could rise. The thin liquidity in the market could exaggerate price gains.

Diversify Your Portfolio

Most traders have the vast majority of their assets in stocks and bonds. Commodities such as palladium provide a way to diversify and reduce the overall risk of portfolios.

Should I Invest in Palladium?

Traders who want to invest in palladium should consider purchasing it along with a basket of commodities that includes other precious metals (i.e., gold and silver), base metals (i.e., copper, nickel, lead and zinc), agricultural commodities (i.e., dairy, meats and grains) and energy.

Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity. It also adds overall diversification to a stock and bond portfolio.

There are three specific trends that could raise palladium prices in the years ahead:

  1. Chinese Demand
  2. Investment Demand
  3. Energy Costs

Chinese Demand

China is the top consumer of palladium and could increase its consumption in the years ahead. The Chinese economy has experienced a recent slowdown, although there are signs this may be coming to an end. Investing in palladium is one way to bet on a resurging Chinese economy.

Investment Demand

The proliferation of ETFs has exposed more traders to precious metals. As the gold and silver trade becomes crowded, traders could seek new ways to gain exposure to precious metals. Palladium could benefit from this trend.

Energy Costs

Higher energy costs make mining an increasingly challenging business. As fuel and electricity costs rise, more mining operations could close or consolidate. This should produce higher palladium prices.

However, traders should also consider the risks of investing in palladium:

  1. A Global Recession: A global recession could weaken Chinese and US automobile demand.
  2. Cheaper Substitutes: Cheaper substitutes could replace demand for palladium in catalytic converters.
  3. Global Economic or Political Control: Global economic or political turmoil could strengthen the US dollar and weaken demand for precious metals and other commodities.

What Do the Experts Think About Palladium?

Most analysts who follow the palladium market pay attention to its price relationship with platinum. One expert sees reasons for optimism about the palladium market compared to platinum:

Palladium expert George Gero

 

Palladium is powering on with the demand for more vehicles. There’s more need for palladium, which cannot be reclaimed as easily or as often from junked automobiles as platinum.

George Gero, managing director, RBC Wealth Management, New York

However, another leading analyst sees reasons for caution. He believes that while the rising market share of gasoline-powered vehicles is a positive, the future presents challenges for palladium prices:

Palladium expert Carsten Menke Julius Bar

 

Diesel’s share of the European auto market is falling and the flip side of that is gasoline’s share is rising. Chinese car sales supported palladium, but there will a reality check as tax incentives are removed. In Europe and the United States, car sales look to be peaking.

Julius Baer analyst Carsten Menke

How Can I Invest in Palladium?

Investors have several options for gaining exposure to palladium prices:

Palladium Trading and Investing Methods Compared

Method of InvestingComplexity Rating (1 = easy, 5=hard)Storage Costs?Security Costs?Expiration Dates?Management Costs?Leverage?Regulated Exchange?
Palladium Bullion1YYNNNN
Palladium Futures5NNYNYY
Palladium Options5NNYNYY
Palladium ETFs2YNNYNY
Palladium Shares2NNNNYY
Palladium CFDs3NNNNYY

*Storage costs are passed on to traders in the form of management fees.

Palladium Bullion

Physical bullion, such as bars or coins, is the most direct way to invest in palladium. However, investing in bullion requires a secure storage facility. Ultimately, the cost of this storage and the low value-to-weight ratio could make holding physical palladium an impractical proposition.

Palladium Coin
Palladium Coin via Wikimedia

Palladium Futures

The Chicago Mercantile Exchange (CME) offers a contract on palladium that settles into 100 troy ounces of the commodity.

The contracts trades globally on the CME Globex electronic trading platform and have a variety of expiration months.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are physically settled by delivery of palladium. 

Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Palladium Options on Futures

The CME offers an American-style options contract on Palladium Futures.

Options are also a derivative instrument that employ leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of palladium futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in palladium futures to profit from their trades.

Palladium ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do. The ETFS Physical Palladium Shares (NYSEARCA: PALL) invests in physical palladium that it stores in secure vaults.

ETFS Physical Palladium Shares

Shares of Palladium Companies

There are many publicly traded companies that have some exposure to palladium prices.

While investing in companies can be a leveraged way to gain exposure to palladium prices, many of these companies have significant exposure to other precious metals. In addition, factors such as company management and the overall stock market can also affect these investments:

CompanyCurrent PriceOverviewListingsFoundedNumber of EmployeesInteresting Fact
Norilsk Nickel

nornickel-logo



The American depositary receipts of the world’s largest palladium producerOTC, London, Frankfurt, Berlin199396,193+The nickel deposits of Norilsk-Talnakh are the largest nickel-copper-palladium deposits in the world
Anglo American Platinum Ltd

AngloAmerican-logo
South African company engaged in the production and sale of platinum group metals.OTC199524,945In August 2007, British charity War on Want published a report accusing Anglo American Platinum's parent company Anglo American of profiting from the abuse of people in the developing countries in which the company operates
North American Palladium Ltd

NAP-logo
Canadian company that explores for palladium, platinum, gold, nickel, copper, and other metals.Toronto1993201-5001 of only 2 North American based palladium or platinum producers
Platinum Group Metals Ltd

PGM-logo
Canadian company that explores for and develops precious and base metal properties in South Africa and CanadaNYSE2002111The Company is focused on exploration and development of platinum. It has operations in South Africa and Canada

CFDs

Illustrative prices only. CFD Service. 80.6% lose money.

One way to invest in palladium is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of palladium. The value of a CFD is the difference between the price of palladium at the time of purchase and its current price.

Some regulated brokers worldwide offer CFDs on palladium. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that traders can have exposure to palladium prices without having to purchase shares, ETFs, futures or options.

Illustrative prices only.
Illustrative prices only.
Illustrative prices only.

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One of the leading CFD brokers for trading metal commodity CFDs, like palladium, is Plus 500. Here’s why:

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade palladium and hundreds of other CFDs
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

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Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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