White Metals Offer White-Hot Opportunities
Until 1998, Palladium traded
in a comfortable range of from $120 per ounce to $180 per
ounce. From 1998 to 2000 this little known, sister metal to
Platinum, expanded its trading range to the $250 to $350 channel.
That expansion was just the beginning…
As the “Commodities Decade” dawned,
Palladium began its assault on an all-time high of $1,075
As you can see from the chart below, Palladium tripled in
value in just one year. Also evident in the chart is the ensuing
collapse in the Palladium price. The very next year, Palladium
plummeted to one quarter of that same all-time high!
The Russian Federation, the world’s largest
Palladium supplier, benefited immensely from the higher prices
commanded by Platinum’s sister. Ford Motor Company,
on the other hand, was not so lucky. Their commitment to Palladium
usage in autocatalysts at the time nearly put them out of
business. This experience, understood by all the auto manufacturers,
surely led to a renewed commitment to Platinum which has more
consistent and predictable worldwide supplies.
Consider the following Platinum and Palladium
facts. Then, we will look a bit closer at what happened with
these related metals in the year 2000 and beyond.
- Platinum is 15 times rarer than Gold…and
Palladium is nearly as scarce as Platinum.
- Both Platinum and Palladium are used primarily
to control emissions in automobile catalytic converters, and
secondarily in jewelry.
- These sister metals are only mined in about
12 regions worldwide, primarily in Russia and South Africa,
and to a lesser extent in the United States and Canada.
- The Russian Federation accounts for approximately
two-thirds of the world’s Palladium supply.
- Russian Palladium supplies come from 3 sources
– the Norilsk Nickel mine, Gokhran (Russia’s gems
and precious metals reserve), and the Russian Central Bank.
- Almazyuveliexport is a state-owned monopoly
that controls all Palladium exports to the world.
As sister metals, Platinum and Palladium are
courted by the same end users. The leading suitor for the
affections of these two metals is the auto manufacturing sector.
In 2005, the auto industry consumed 46% of the world’s
Platinum supply, and it consumed 45% of the world’s
The jewelry industry is next in line. As you
can see from the chart for Platinum below, substitution of
one sister for the other has an impact on the prices of each.
Palladium prices fell sharply in 2001, and, soon thereafter,
Platinum prices began their rise.
In the mid to late 1990’s, auto manufacturers
began to substitute Palladium for Platinum in catalytic converters
because it was cost-effective to do so. Up until that time,
Platinum had traded consistently at twice the cost of Palladium.
However, with the Platinum price moving up, it made economic
sense to adjust the composition of the catalytic converters
in favor of the lower-cost but less-efficient sister –
This change in composition in the manufacturing
process does not occur by just flipping a switch. It requires
time and money to retool production lines. But, with the pricing
incentive in place, that is exactly what the auto manufacturers
did – they re-tooled for Palladium.
The problem was that they believed they could
count on consistent supplies of Palladium coming onto market.
That belief was quickly proven to be unfounded.
Russian control of world Palladium supplies
being what it was (and still is) was felt with a vengeance
when they halted supplies due to bureaucratic wrangling over
export quotas. Believe me, when the world’s largest
supplier of a commodity simply stops shipping that commodity,
the price will rise…and quickly!
This is exactly what happened in 2000 with Palladium.
Conversely, when Russia resumed shipments, and the auto manufacturers
reverted (after some time and expense) to Platinum, the price
fell even more rapidly than it rose.
Opportunity Comes With an Element of Risk
Over the past four years, Palladium has traded
in a range from $180 to $250 per ounce. Meanwhile, her sister,
Platinum, has been steadily rising, and earlier this year,
Platinum set new all-time highs at $1,085 per ounce…surpassing
its 1980 high of $1,050 per ounce. With Platinum at 4 times
the price of Palladium, the substitution of Palladium for
Platinum is more appealing than ever.
By now, we would have expected this substitution
to have already been completed, but the Russians still control
Palladium world supply. With the vivid memory of halted Russian
Palladium shipments lingering in everyone’s mind, it
is difficult for auto manufacturers to take that step.
They chose not to substitute at a Platinum/Palladium
price ratio of 2 to 1. They passed again when the ratio hit
3 to 1. At 4 to 1, the ratio is too compelling to ignore.
Auto manufacturers are now beginning to herald increases in
Palladium consumption for catalytic converters.
The risk here is Russian supply reliability…just
as it was in 2000.
But there is more to this story this time around.
That is why the risk may be one worth taking.
What’s Different This Time?
The first difference is a design change in catalytic
converters. Platinum or Palladium in a catalytic converters
have little to no effect at low temperatures. That is why
you are instructed to drive your vehicle for a certain recommended
period of time before you go to have your vehicle emissions
checked. Therefore, the quicker the converter heats up, the
sooner it is able to perform its function.
Newer designs place the catalytic converters
closer to the engine block. This favors Palladium which has
a higher melting point than does Platinum.
The second, more significant difference between
now and 2000 can be summed up in one word…CHINA.
Last year alone, car sales in China increased
by 50%, making China’s auto industry the fastest growing
auto industry worldwide. It is estimated that by 2011, China
will produce 8 million automobiles or twice as much as current
And China is not immune to the stringent worldwide
emissions standards, especially if they wish to maintain the
standards required of them to host the 2008 Olympic Games.
So, more automobile manufacturing equals more auto catalytic
converters. The production of more catalytic converters leads
to more Platinum and Palladium consumption.
With Platinum prices at 4 times that of Palladium,
the cheaper sister is looking more and more attractive. This
is true in other sectors where the sibling metals are consumed
as well. Of note is the jewelry industry.
When supply and demand statistics are released
for 2005, most experts anticipate that we will have seen a
70% increase in Chinese consumption of Palladium for jewelry.
The reason for this considerable increase in consumption is,
once again, the high Platinum price.
In the past, Palladium had been primarily used
with Gold to create white Gold. Now, for jewelry purposes,
consumers are looking to purchase Palladium jewelry. It is
a pure, white metal with similar properties to Platinum…but
the price tag is a heck of a lot lower!
How Can One Invest In Palladium?
As with other precious metals, investors can
purchase shares in Palladium mining companies or mutual funds
that allocate a portion of holdings to Palladium mining stocks.
Clearly, this is not direct ownership of Palladium, and a
rising Palladium price does not guarantee a similar rise in
Alternatively, Palladium can be traded in the
futures and options markets. However, these accounts are leveraged
and - for a novice - are typically not recommended. There
is potential to loose all of one’s principal and then
some. These types of investments are Risky…with a capital
For most investors, ownership of Palladium bullion
bars or coins is the desirable form of participation in the
Palladium market. Investor-grade bars are available from major
and respected refineries, and investment grade coins are available
as well. Palladium Emus from Australia and Palladium Maple
Leafs from Canada are both relatively easy to acquire.
Does Palladium Represent a Real Opportunity?
Investments in Palladium certainly bring with
them the overhanging risk of supply reliability due to Russia’s
control. However, changes in catalytic converter design, increased
demand for Palladium worldwide (especially in China), and
the new all-time high prices of Platinum certainly present
It is conceivable that even if wholesale
substitution of Palladium for Platinum does not occur, increased
demand for Platinum Group Metals (PGMs) alone could trigger
a further rise in the prices of both these rival siblings.
Since the potential volatility of an investment in Palladium
cannot be ignored, Palladium is typically not a candidate
for “core holdings” of precious metals. Many experts
do agree that a smaller, growth-oriented allocation may be
is President of Asset Strategies International, Inc. (www.assetstrategies.com),
), is based in Rockville, MD, and specializes in the areas
of precious metals, foreign currencies and overseas wealth
protection. For more information, please contact Michael at
800.831.0007 or 301.881.8600. You may also e-mail him at email@example.com.
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