Last updated on 9 de April de 2023
Precious metals can be a great investment. In this post we analyze the idea of investing in Palladium: arguments for it, risks to consider, and how to do it.
Content
- Introduction
- Palladium Applications
- Historical Palladium Prices
- Ratio between the price of Palladium and Gold & Platinum
- How to Invest in Palladium
- Conclusion
Introduction
Palladium is a silvery-white looking precious metal. Its appearance is very similar to that of platinum, although slightly darker. It was discovered in 1803 by English chemist William Hyde Wollaston.
Its name comes from the asteroid Pallas, which was discovered just two months earlier and named after the Greek goddess Pallas Athena.
Platinum belongs to the platinum group metals (PGM). It is of great durability, hard and non-corrosive. Of the 6 PGM metals, palladium is the one that melts at a lowest temperature, just above 1,550 degrees Celsius.
Annual palladium production is about 200 tons. Production has barely increased over the past 20 years despite its significant price appreciation.
The main palladium-producing countries are Russia and South Africa, although Canada, the United States and Zimbabwe also have some major mines.
It should be noted that palladium is generally extracted as a by-product in mines that mainly produce nickel and palladium. Consequently, it is not easy for mining companies to increase the amount of palladium they produce.
Palladium Applications
Thanks to its unique properties and attractive appearance, palladium has multiple applications:
Automotive Industry
The automotive industry is the main consumer of palladium. Almost 85% of all palladium mined in the world is used for the production of catalytic converters.
Catalytic converters are devices used in vehicles with internal combustion engines, both gasoline and diesel, to reduce the level of toxic gas emissions. These devices also tend to contain platinum and rhodium.
New environmental regulations have forced vehicle manufacturers to produce better and more sophisticated catalytic converters, which means they must use a greater amount of precious metals. This has been positive for the producers of all three metals.
However, the events that have taken place in the automotive sector over the last few years have been particularly positive for palladium.
This is because palladium is used in greater quantities in catalytic converters for gasoline engines, while platinum is more present in catalytic converters for diesel engines.
The loss of popularity of diesel cars has led to a relative increase of demand for gasoline cars relative to diesel cars. As a result, palladium prices have exploded relative to platinum prices.
It is worth mentioning that, in the past, palladium used to be cheaper than platinum. Consequently, car and truck manufacturers favored the use of palladium over platinum in catalytic converters, as both metals have very similar characteristics and are substitutable to some degree.
Because the price of palladium has been higher than platinum since 2017, this may motivate manufacturers of catalytic converters to reduce the amount of palladium they use in favor of platinum.
Palladium is also present in electric cars, though to a lower extent. When it comes to cars powered by hydrogen, both palladium and platinum are key elements required to build the storage facilities that need to be installed in these cars.
Jewelry
Palladium is very versatile and thus appropriate to make jewelry and watches. It is one of three metals that can be used, in combination with gold, to produce white gold, and the most prestigious one. The other two alternatives are silver and nickel.
Jewelry made primarily from palladium is popular when its price falls relative to the price of gold and platinum.
Medical, Dental & Electronic Products
Thanks to its unique characteristics, palladium has multiple applications in the medical and dental sectors. For example, palladium is ideal for the production of surgical tools and dental prostheses.
Palladium is also used for the manufacture of multiple complex electronic products.
Investment Products
A small percentage of palladium mined each year goes to investment products, such as coins and bars. While it is not as common to buy physical palladium as gold and silver, investor demand certainly exists.
Some national mints, including the British Royal Mint, coin palladium coins that can be used as legal tender and tend to be exempt from capital gains taxes.
Historical Palladium Prices
At the beginning of 2023, palladium was trading at around $1,500 per ounce. This makes it the most expensive of the four major precious metals, though still much cheaper than rhodium.
Nevertheless, its price has reached $3,000 at some point in the past:
Keep in mind that the price of palladium can be very volatile. If we look at the price action from the year 2000, we will see that the price of palladium exceeded $1,000 per ounce for the first time in history in 2001. However, by 2003, it was trading at $150, an 85% drop. Since then, it took 5 years to reach $500 in early 2008, only to go down to $150 again by the end of that year.
Since late 2008, palladium has been in a major bull market. At its top, its price had gone up 20 times in less than 15 years. But that secular rally has also seen cyclical drops of more than 40% in a matter of months. As a result, if you are interested in investing in palladium, consider its price volatility.
The price of palladium responds to the existing dynamics on the demand and supply sides.
On the demand side, the state of the economy can be a very powerful variable, as car manufacturing is closely correlated with economic growth. At the same time, regulatory aspects, again closely linked to the automotive industry, also play a very important role.
On the supply side, because most palladium comes from Russia and South Africa, the risk of supply chain disruptions is considerable. These countries are prone to instability due to geopolitical dynamics and internal conflicts, which can disrupt the delivery of palladium and create problems in key industries.
Ratio between the price of Palladium and Gold & Platinum
Palladium was historically cheaper than both gold and platinum. This was partly due to the amount of palladium being mined in the Soviet Union and, in the 1990s, Russia.
However, the situation has changed over the last few years due to environmental regulations on the automobile industry, which have led to an increase in demand for palladium.
The first comparison we will make will be between palladium and platinum. Both metals have many characteristics in common, not only their appearance, and are often substitutable. The following chart shows the ratio between the prices of palladium and platinum.
Except in the years 2000 and 2001, palladium had always been much cheaper than platinum, hence the ratio is below 1. In fact, that is precisely why vehicle manufacturers used to give preference to palladium in the past: to reduce costs.
However, since the end of 2017 the ratio between palladium and platinum has been above 1, which indicates that palladium is more expensive than platinum. Since the beginning of 2020, the ratio is above 2, indicating palladium is more than twice as expensive as platinum, and has come close to 3.
The conclusion is clear: palladium has become significantly more expensive relative to palladium in recent years.
If we believe that this ratio will normalize in the future, we will prefer to invest in platinum instead of palladium. However, it is important to understand that, while they do have many things in common, palladium and platinum are subject to different demand and supply dynamics.
In the next chat we see the ratio between palladium and gold prices:
The ratio between palladium and gold has mostly been below 1. That indicates that one ounce of palladium costs less than an ounce of gold.
The lowest level for this ratio since 2000 was at the end of 2008, when it stood at 0.2. That indicates one ounce of gold cost the same as 5 ounces of palladium. This was due to the fall in demand for palladium, due to the poor economic situation, and the increase in demand for gold in the midst of financial turmoil.
Since the beginning of 2019, palladium has again become more expensive than gold, thereby pushing the ratio above 1.
How to Invest in Palladium
There are various alternatives available for those interested in investing in palladium:
Physical Palladium
While not as popular as either gold or silver, physical palladium can be bought for investment purposes. There are both coins and bars available.
Buying physical palladium is very simple. You will find it on websites such as CoinInvest (non-sponsored) in various denominations. You can then decide whether you store it yourself or put it in a safe vault.
One disadvantage of investing in physical palladium is that in most countries the purchase of palladium is subject to VAT.
Palladium ETF
For those who wish to invest directly in palladium without having to make physical purchases or pay VAT, it is possible to buy shares in a palladium ETF.
Several asset management firms and banks offer palladium ETFs to investors. One option is the palladium ETF managed by the Swiss financial entity ZKB, which is backed by 100% physical palladium, and stored in vaults in Switzerland.
Palladium Producers
Finally, we also have the option of investing our money in palladium producing companies. Most of them are in Russia and South Africa, although you will also find some in the United States and Canada.
Remember that, when investing in stocks, the price of the metal is only one of the variables to consider. Given the location of the largest palladium producers, country risk is a factor that should be taken into account.
Conclusion
Palladium is one of the most important precious metals and fundamental to the global automotive industry. Its applications are therefore mainly industrial and not monetary, unlike gold.
Investing in palladium can be a good way to profit from growing demand and stagnant supply. In addition to that, being a real asset, palladium should offer us some level of protection against inflation.
From a portfolio perspective, it can add diversification to our investments as its price is not completely correlated to the price of other commodities or the general equity markets.
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