Rhodium Now Up 30% in 2019 and Cracks $3000/oz

Rhodium

When people think of valuable precious metals, gold immediately comes to mind, along with palladium and platinum. Rhodium is actually now worth more than any of them.

Rhodium isn’t a precious metal that many people have that familiar with, although they might have seen it used in jewelry to plate silver. Silver tends to tarnish, and by putting rhodium plating on top of it, it can retain its lustrous silvery look for longer.

Most rhodium is actually used in catalytic converters, which consumes 80% of all the rhodium mined each year. Catalytic converters greatly reduce the carbon monoxide emissions from gasoline engines, turning it to the much more harmless carbon dioxide, and are required in most areas to reduce the impact that vehicles have on the environment.

Palladium and platinum are also used in this process, with palladium being the most used metal nowadays for this, although rhodium is often also added to help with the chemical reactions necessary to accomplish this pollution reduction.

Rhodium is also used widely in electronics, and just about all of the rhodium out there is used as industrial inputs of some form. Very, very little of it is used for investment purposes, which has no real measurable effect upon demand and price, which is all driven by industry.

Rhodium doesn’t even trade on the futures market like other precious metals such as gold, platinum, palladium, and silver. This is notable because even with metals whose demand comes predominantly from industrial use and not investment, futures trading does introduce the influence of speculation and adds volatility to the price of an asset. Even the producers and end users don’t speculate at all with rhodium, which actually has a stabilizing effect on price.

Rhodium Is Nowhere Near as Undesirable as Many Think

Rhodium has been accused of being pretty volatile, and if this is to mean that it can move in price quite a bit, it certainly can be, but it does so in a much more stable fashion than other precious metals, who are notorious for their wide swings in price on any time frame.

If we look at a 5-year chart of rhodium prices for instance, we see a gradual drop over the first three years, and a gradual but more pronounced rise over the last 2, both very steady in nature, with the upside move particularly picking up once we hit the beginning of 2019. This is as stable of a chart as you will ever see with anything, and nothing as wild as rhodium is made out to be.

This is a real positive for those who are seeking to invest in it, especially when compared to other precious metals, whose wide bounces can challenge even the most adept of traders. Individual investors really don’t have very good trading skills, and something that is easier to trade is therefore a plus, and rhodium has certainly been that lately.

This is because the demand is coming from industry and not investors and traders driving the price up and down based upon factors external to a metal’s industrial demand. Futures trading does this as well to a degree, and with no one affecting the rhodium market that way, and industrial demand being quite stable, this makes it a lot easier for people to stay in when they should and not be faked out so to speak by temporary moves against them.

Back when the price was under $1000 an ounce, rhodium became more appealing competitively for pollution control use, and auto makers started using it more. There were some who were preaching getting into rhodium back then, and the reasons made sense, and some did invest in it and were rewarded by some very impressive returns since.

In addition to the rising demand for catalytic converters in China, who are now more focused on reducing the massive pollution they have, Fiat recently recalled 862,520 of their vehicles sold in the U.S., which among other issues, require their catalytic converters to be replaced.

Rhodium Can Be a Good Investment, At the Right Time

There is a very limited supply of rhodium that is produced in the world each year, and it isn’t even mined directly, it is a by-product of mining of nickel and platinum and is therefore dependent on the amount of mining we do with these other metals.

This serves to set production at a certain level which is really independent of demand, and therefore rising demand will convert directly to higher prices. This is in contrast to other precious metals, like gold for instance, where the price of gold can go up enough to make marginal extractions profitable and therefore stimulate production as well to some degree.

There is very little rhodium left over for investment purposes, but it can still be bought through dealers. This does involve a retail markup, as we see with buying other physical precious metals. While the spread between the buying price and the selling price does differ quite a bit with rhodium, it’s not really that much higher than palladium, and you can turn around your bars for only about a 10% spread these days, which is not that unreasonable.

This does mean that the price must go up 10% for you to break even, but if the potential is much greater than this, like it was back in 2017 when you could get it for less than $1000 an ounce, and even in 2018 when it could be bought under $2000 an ounce, this can end up working out very well.

Rhodium is also traded on a couple of obscure ETFs, but they have very little liquidity and there really isn’t anywhere near enough rhodium out there that can be purchased by an ETF to make a real go of such a thing. An ETF that only trades a couple hundred shares a day isn’t the sort of thing that we should be messing around with anyway, even if you can find a way to get in on this action.

The huge lack of liquidity with rhodium isn’t really a valid criticism with the physical metal, no more than with other precious metals that is, which are all quite illiquid insofar as you can’t just move in and out of physical metals at the drop of a hat at a relatively low cost like you can do with precious metal ETFs in general. You can still sell it back to the dealer though without any trouble so that’s plenty liquid enough for physical metal investors.

As with all investments, we can’t just look at how much something is going up and just jump on with no real sense of where things may be going from here, during the time horizon of our investment. Physical metals can’t really be traded like securities can, so investing in them does require a certain commitment, of a year or more.

While rhodium may indeed appreciate in price further, we need to realize that it does have competition from palladium and platinum. While manufacturers can’t just switch back and forth at will, and this does involve some significant re-tooling of their plants, there is always a point where the price of an input can rise relative to substitute inputs that this change can be warranted economically.

We therefore do need to worry that if rhodium does keep going up, this may happen, and if it goes up enough, it certainly will. We could jump in and just look to ride this wave, and it’s been a really easy one to ride so far, and risk the 10% spread plus whatever risk tolerance we add. With investing though, timing is everything, and we need to ask ourselves if this ship has already sailed too far to make enough sense out of this play to justify the risk.

At the very least though, we need to cast off the misconceptions of rhodium being a waste of time to invest in period, being too volatile and illiquid, as neither are really that big of a concern. Timing an investment always is though.