Palladium is a rare, soft metal. While palladium is very similar to platinum, it has a lower melting point, is less dense, and is more useful in a number of industrial capacities. Palladium is only mined in a few places around the world, including South Africa, Montana, Ontario and Russia. Palladium has become a popular investment recently due to low supply and high industrial demand.
So Why Invest in Palladium?
Worldwide production of palladium is limited by its rarity. While stockpiles of palladium exist, their supplies are dwindling, leading many investors to believe that the value of palladium will rise sharply.
Palladium is a precious metal similar to gold, silver or platinum. It is used in jewelery for its white gold color and as a component in alloys. Unlike gold or silver, there is a large amount of industrial demand for palladium. Much of this demand comes from worldwide production of catalytic converters, which require palladium’s unique properties as a catalyst to function. Chemists have found new and innovative uses for palladium as recently as 2010, when new research into its properties won a Nobel Prize.
Palladium is additionally used as a component in consumer electronics. Palladium is a key component of multilayer ceramic capacitors and is used to plate connectors in many electronic devices. As demand for electronics continues to increase, the value of palladium is likely to go up.
Finally, palladium is used in the purification and storage of hydrogen. While fuel cell cars remain a distant glimmer on the horizon, hydrogen is an abundant element that has a variety of industrial uses. Should new technology or logistical capacity emerge and cause hydrogen fuel cells to become more prevalent, the price of palladium will skyrocket.
In 2001, many investors turned to palladium due to speculation based on its industrial demand. When it reached highs of over $1,000 an ounce, the Russian government began to sell of a large stockpile of palladium it had accumulated during Soviet years, causing the price to drop. Since then, palladium has recovered almost all of its value, despite the sudden increase in supply. The Russian government cannot continue to offload 2 million ounces of palladium a year onto the market forever. When the stockpile runs dry, supply will collapse and palladium prices will begin a rapid upwards trend.
What Are My Options When Investing in Palladium?
Like other precious metals, there are a variety of ways to expose your portfolio to palladium. Investors can purchase bullion or coins, ETFs, futures or equity in palladium related companies. Because of the relative lack of liquidity of physical palladium coupled with high industrial demand, futures, ETFs and equity are better options than physical coins or bullion for most investors.
Palladium is available in bars as well as coins. Some countries have begun to impose assaying standards on palladium purposed for jewelery. Both China and Canada have palladium coins available to investors. There is low supply, demand and liquidity for physical palladium, meaning that you should make sure that you have a buyer lined up before risking your investment.
A futures contract is an agreement to purchase a certain amount of a commodity at a later date for a set price. Investors use the market for these contracts as a way to make money off of commodities without actually owning them. By selling the contracts before they settle, investors can make money off of price changes without having to deal with the logistics of moving physical palladium or lining up a buyer.
Futures contracts remain daunting to some investors, leading to the creation of ETFs or exchange traded funds. These are stocks whose prices are tied to the value of a commodity rather than the performance of a company. ETFs can be purchased through a broker or on an exchange the same way that a regular stock can be purchased. At least two palladium ETFs exists at the time of this writing: ETFS Physical Palladium (PHPD on the London Stock Exchange) and ETFS Physical Palladium Shares on the New York Stock Exchange.
Rather than directly purchasing palladium or palladium futures, some investors prefer to invest in the companies surrounding the mining, transport and stockpiling of palladium. This practice operates in a similar way to buying an ETF: you buy stock, and the value of your stock is tied to the value of palladium. Unlike an ETF, however, these stocks are tied to the performance of an individual company and may suffer from price swings independent of the price of palladium. Do your research and be sure to choose the company that best fits your portfolio to purchase equity in.
Is Palladium Investing Safe?
Just like with any other investment, there are risks associated with investing in palladium. A sound strategy when investing is to manage the level of risk you are exposed to by holding a variety of assets and asset classes. You probably shouldn’t sell your house and buy physical palladium with the proceeds. Instead, develop a plan for entering the market, taking on an appropriate amount of risk and exiting the market when the time is right.
Palladium prices have been on an upward trend since the market crashed in 2001, despite the existence of a massive Soviet stockpile. Consumer demand for electronics continues to increase. The infrastructure needed to support fuel cell cars has been rolled out in a small number of cities worldwide. New industrial applications for palladium continue to be found. Because of these factors, demand for palladium will continue to increase. Palladium is an element; supply will not increase. It will not be economic to synthesize palladium from other materials in our lifetimes. With steadily increasing demand and limited supply, the price of palladium is certain to go up. Best of all, the industrial demand for palladium derives from safe, ubiquitous uses. There is little chance that the world will choose to stop using cars or iPads anytime soon. Because of this, palladium is a fairly safe investment that has a good chance of yeilding extremely large returns.