Whenever an asset falls in value by 80%, it
has to be examined for its potential as a contrarian, value-oriented
investment. Such is the case with Palladium. In a commodity
bull market, where substantial run- ups have occurred in oil,
copper, precious metals, and other raw materials, palladium
has escaped the notice of most investors. Even more interesting,
is that the price of palladium has declined in the midst of
rising demand. I believe that this trend is about to reverse,
as the manufacturing community is taking notice of the substantial
spread between the two metals that are similar in their industrial
My Mechanic Knows
This past weekend, my wife and I took our car
to the local mechanic. We needed to replace our catalytic
converter, and figured that we would get a couple different
quotes on how much it would cost us. Now, I don’t know too
much about cars, but I figured that a catalytic converter
was a catalytic converter. Meaning, if a catalytic converter
accomplished its goal- which was aid in clean fuel emissions,
than it was just as good as any other catalytic converter.
Consequently, I assumed that the prices of the different converters
would be relatively the same. I was shocked to find out that
Converter A was twice as much expensive as Converter B. Of
course, this all made sense when my mechanic mentioned that
the difference between the converters was the primary metal
that was used. “Palladium,” he said, “is substantially cheaper
Demand for the Metal
Although palladium is used in a variety of industries,
from electrical components to surgical instruments, its greatest
demand is set to come from the automobile industry.
The demand for palladium from the automobile
industry is based purely on cost. The spread between the two
metals is significant. If you look at the charts below, you
can see that Platinum is currently trading at over $900/ounce,
while Palladium is just under $200/ounce.
From a cost-effective point of view, palladium
catalytic converters are substantially cheaper. However, as
the charts above show, this has not always been the case.
When palladium was at record highs, the automobile industry
switched to platinum based catalytic converters and in the
process, accumulated a substantial amount of reserves.. As
the automobile industry starts to deplete its platinum reserves,
they will revert back to the cheaper palladium. In fact, this
has already started to happen. Industry reports show that
demand for platinum from the North American automobile industry
declined by 10 % in 2004. Conversely, the demand for palladium
increased by 20 % in 2004.
The demand for palladium has also increased
With the fastest growing automobile market in the world, the
Chinese are scrambling to meet its fuel efficient standards
for the 2008 Beijing Olympics. Once again, this bodes well
for palladium since it is a cheaper substitute to platinum.
The Other Precious
In addition, the longer a bull market in commodities
rolls along, the more palladium will likely come to be viewed
as a precious, rather than industrial, metal. Like, silver,
which is often viewed as a “poor man’s gold”, palladium may
experience its biggest gains late in a precious metals market.
Currently, palladium is trading just under $200/ounce.
Looking at the chart below, we can see that palladium has
bounced between the 180 and 205 levels. At this price, I would
buy the metal in increments. From a psychological perspective,
investors are still uneasy about an intermediate upward trend
in the metal. I would expect continued resistance throughout
Now, investors should beware: historically,
Palladium has been a volatile and speculative metal, with
prices trading from over $1000 per ounce (January 2001) to
as lows as $150 in April 2003. I believe, however, that because
the potential gain for palladium could be substantial, it
can be looked at by many investors as an attractive speculative
counterpart to gold and silver, the holdings that should be
treated like the cornerstones of a precious metals portfolio.
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Senior Market Strategist
Financial, Inc. specializes in providing
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and professional commodity trading advisors world-wide.
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