Palladium recently broke out to multi-month highs and thanks to strong demand from the car industry and stagnant mine supply, this vital industrial/ precious metal could be one of the star performers of 2013 & beyond.
As Richard Williams noted in his recent article, palladium recently broke out to multi-month highs while the other three precious metals fell. As the long-term chart below shows, palladium is still 38% below the record high of $1,090 an ounce it reached in 2001, and 22% below its 2011 high. However the fundamentals for palladium look very strong with demand exceeding supply for a second year running.
A 20 year daily chart of palladium (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
The majority of palladium supply is used in catalytic converters, and strong demand from the car industry has helped the part-precious, part-industrial metal advance more than 20% in a little over 5 months.
In 2012 global car sales exceeded 80 million for the first time ever and will rise by 2.4% to 82.7 million this year, according to LMC Automotive, a research company in Oxford, England. In November, car sales in China, which is now the world’s biggest car market, rose nearly 9% year on year, to 1.46m units as their economy recovers from the recent slowdoen.
The average catalytic converter contains around 4 grams of palladium and Morgan Stanley expects record demand for the devices to persist for the next five years. The investment bank also expects a supply/ demand deficit to persist until at least 2017 and predicts that palladium will reach a record annual average price in 2014.
During 2013 Barclays estimates that palladium consumption will beat production by 5,11,000 ounces, which is the equivalent to what the car industry uses in around seven weeks. Palladium (along with tin and platinum) is one of three supply shortages left among the ten base and precious metals tracked by the bank.
Over on the demand side the outlook also favors higher prices.
Last year’s pay disputes at mines across South African contributed to a contraction in mine supply of almost 11%, and Barclays estimates that supply will only increase by 0.3% this year. The disputes in South Africa also remain far from resolved and more disruptions are likely this year. Barclays also thinks that sales from Russian government stockpiles will drop to 2 million ounces this year, from 1 million ounces as recently as 2010.
Data from the US Commodity Futures Trading Commission (CFTC) shows that hedge funds and other large speculators have almost tripled their bets on higher palladium prices since the start of November. Hedge funds are now the most bullish on the metal in at least three years.
How to play higher palladium prices
There are a number of different ways to profit from higher palladium prices, including spread betting and CFDs. However, due to the metal’s volatility, the best way to gain exposure to higher prices is likely via a physically-backed exchange traded fund (ETF).
ETF Securities provide two Physical palladium ETFs, the ETFS Physical Palladium Shares, which is listed on the NYSE ARCA under the symbol PALL, and the ETFS Physical Palladium, which is listed in London under the symbol PHPD.