With palladium surging over the last 5 months, increasing in value by 40% over this relatively brief period, it has now surpassed gold in value and may go higher.
Gold has traditionally been the king as far as being the world’s most valuable precious metal, although from time to time it becomes surpassed by one of the other rare and valuable precious metals, platinum and palladium.
Platinum, which was worth over $1800 per once back in 2011, has been pretty bearish since and is currently struggling to keep its head above the $800 mark. While this has presented some good opportunities for those willing to take the short side of precious metals, most investors steer away from placing bets on things going down, and you certainly can’t do that when you own physical metal.
Palladium, on the other hand, has experienced a resurgence over the last 5 months, and has gone from $845 an ounce on August 15 of last year breaking $1400 on January 17. That’s a serious price move over this relatively short period of time, and given the current market conditions, it could be set to go even higher.
Jumping on something this late in a move like this generally requires forbearance, as we want to be careful entering a position after such a big move as these situations often involve something being overbought and sellers are often at the ready to take profits and drive things in the other direction.
The nature of the palladium market does make it a little different than most markets though, given that so much of its demand comes from industrial uses, especially from auto manufacturers. Palladium is the metal of choice these days for pollution control devices in vehicles, and this demand is increasing.
While the amount of palladium in vehicles only amounts to a few grams and doesn’t really impact the cost of automobiles very much, amounting to a couple hundred dollars on vehicles costing tens of thousands typically, when you spread that over all the vehicles manufactured in the world, that does add up to a lot of palladium.
Palladium has been in widespread use for quite a while now
Manufacturers have been using palladium for use in catalytic converters since 1989. The devices change the composition of exhaust from combustion engines and reduce the amount of pollutants released. Palladium is particularly effective at achieving the chemical reactions required for this.
Platinum can also be used as a substitute, which is considerably cheaper these days, by over $500 an ounce. While switching to platinum would involve some real savings by auto manufacturers, it has to be high enough to justify the expense of retooling plants, which in itself is a very expensive proposition.
The industry used a total of 8.5 million ounces of platinum last year, a figure that has been trending up over the last decade, and has grown by 50% since 2010. This all adds up to about $12 billion worth of palladium a year, and switching to platinum would deliver an annual savings of about $5 billion a year, so the numbers here are on the larger side for sure and the kind that does garner attention from manufacturers.
The spread where it is felt that this switch would be justified is believed to be around $500, and we’re already well over that, but no one is rushing off to convert their auto plants. While $500 might be the target of some people, we need to account for the fact that the speculation they would be making extends beyond today’s spot prices and well into the future in fact.
Precious metals are quite volatile and a lot can happen in just the time it takes to implement the manufacturing changes to allow platinum to replace palladium in pollution control devices. Once the change is made, vehicle makers are going to be pretty reluctant to switch back, so the benefits of this change do need to be fairly long lasting to make sense of this,
Palladium has been used for this for 30 years now, and the prices of palladium and platinum have changed a lot over this time, making one more preferable over another at various times.
There is always considerable uncertainty with future commodity prices
Deciding this therefore comes down not so much to what the spread may be now, but what it may be over a period of years. This involves forecasting these markets, although when we do this, things do indeed look pretty bullish for palladium.
This is mostly due to the limited supply that we have and the limited amount of palladium that is mined each year. The movement in price that we’ve seen is based upon supply not being able to keep up with demand, and whenever this happens in a free market, which the palladium market certainly is, it means that the price will rise, as more people compete for the same resources.
Since the auto industry consumes so much of the world’s platinum, those who track the metal pay close attention to it. Should we enter a recession, or even significant economic slowdown, this can force the price of palladium down. Palladium traded below $200 an ounce as recently as 2008 during our most recent recession.
Palladium’s use in industry isn’t limited just to cars though, as it’s also widely used in electronics, among other things, and the demand for this in particular is increasing.
Palladium still does look pretty bullish at $1400 an ounce though, all things considered, although we do need to keep a close eye on the plans of the auto industry, which has the potential to bring things crashing down if it chooses.