The Strategist

Is it worth investing in palladium?

03/11/2019 - 11:40

Rapid rise in prices for palladium, which have almost doubled in the last six months, is attracting attention of private investors. Is it worth investing in this metal now?

James St. John
James St. John
At the end of February, the cost of palladium has exceeded the level of $ 1,500 per troy ounce for the first time in history, and on February 26 the price of the metal reached $ 1,534 per ounce. Currently, quotes have stabilized near the level of $ 1,500 per ounce. The rapid rise in prices for palladium has continued since August last year, and during this time the metal has climbed up by more than 80%. Since the beginning of 2019, the precious metal has increased in price by more than 25%. This year, no other precious metal can boast a high growth rate. Since the beginning of the year, gold has risen in price by only 1.5%, to $ 1,328 per ounce, platinum - by 7.7%, to $ 855 per ounce, silver - by 2.6%, to $ 15.9 per ounce.

The jump in prices for palladium is associated with a shortage of metal in the world market. According to Johnson Matthey, the global platinum distributor, the consumption of palladium by the automotive industry in 2018 increased by almost 3% to a new historical maximum of 8.66 million ounces.

More than 2 million ounces were used by the jewelry industry. The largest metal producers in Russia and South Africa increased their production by more than 8% to 6.88 million ounces. Another 10% increase came from recycling of metal from scrap, which gave another 3.2 million ounces. To cover the missing amount, exchange-traded funds had to sell over 0.55 million ounces of palladium. Yet, the deficit persisted.

However, in 2019 the market situation may worsen, as the demand for metal from the industry will grow steadily, and the possibilities of producers will be limited. In addition, due to the withdrawal of assets from exchange-traded funds, they have decreased fivefold since 2014, to 0.7 million ounces. This amount may not be enough to compensate for the missing volumes. In such circumstances, the rise in metal prices may continue.

The main risk for the palladium market can be development of technologies to replace it with platinum, which has already been done in the early 2000s.

Then, due to the high demand for metal from the automotive industry and its shortage, the cost of palladium grew eightfold. However, after manufacturers of auto components increased the use of platinum, and manufacturers pushed extraction of metal, its price remained at $ 200-400 per ounce for a long time. After 2000, the cost of palladium decreased, and platinum grew, and already in 2004 the ratio of the price of platinum to palladium was 1: 4. Based on the historical parallel, the current levels are attractive for investment in platinum, but it cannot be ruled out that this year palladium will continue to grow, given its deficit in the market.


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