Palladium is the least known of the four precious metals (gold, silver and platinum being the others), but that does not mean the white metal is void of a valid investment thesis. Actually, the opposite is true because palladium, as is the case with silver, has extensive industrial uses. Additionally, like the other precious metals, palladium can be used as an inflation hedge.
Rising Auto Demand
One reason to invest in palladium is on the basis of an expected increase in automotive demand. In this case, however, investors need to be aware of where that demand is coming from. When using palladium as a way of playing rising auto sales, be sure it is China and the United States that are seeing those increased sales. The reason is that most cars and light trucks manufactured and sold in China and the United States, the world’s two largest auto markets, use palladium as an essential ingredient in catalytic converters. Many cars made in Europe use platinum, not palladium, in their equipment.
One of the most obvious reasons to invest in any commodity is that supplies are falling. Declining supply has the same impact as rising demand: It makes prices increase. When it comes to palladium-producing countries, Russia is the largest. While the country is rarely open about the amount of its palladium reserves, strong evidence suggests that Russia’s production of the metal is declining. Additionally, South Africa is the second largest palladium-producing country and labor strikes there have been known to hamper output, forcing palladium prices higher in the process.
An Inflation Hedge
Like the other precious metals, palladium is priced in U.S. dollars, meaning it has an inverse relationship to the greenback. For example, when the dollar appreciates, rarely do precious metals follow suit because the stronger dollar can buy more ounces of the metals. Conversely, when the dollar weakens, consumers lose purchasing power and gold is often seen as the ideal hedge against this scenario, also known as inflation. Given that dollar-denominated commodities respond positively to a weak dollar, palladium also works as an inflation hedge.
The Price Is Rising
Of course, this is a natural result of increased demand and slumping supply, but palladium has both factors in its favor. Aside from an interruption at the hands of the global financial crisis in 2008-2009, palladium has been steadily increased in value from the start of the 21st century through at least the early months of 2013. That trend will continue as long as demand grows or supplies fall. Palladium prices just need one of those factors to play out to rise, but both could happen, benefiting investors along the way.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.