Palladium: an exotic investment?

Published on 29. May 2019

Palladium: an exotic investment?

Gold, silver and platinum have long been known as a store of value. But what about palladium as an investment? As the exotic one among precious metals, it can clean more than exhaust gases and it’s a smart bet for the future.

Is Palladium A) a French shoe brand, B) a theatre in London, or C) a precious metal? The correct answer - all of the above. Option C, however, is what has sparked the most excitement amongst investors. In recent months, Palladium has witnessed a spectacular rally on the stock market, where one troy ounce (approximately 31.1 grams) of the white-silvery shimmering metal reached more than 1,600 US dollars on the commodity exchanges. This new record, set on the 21st March 2019, saw palladium once again surpass gold - the investment classic, despite the fact that it’s actually a waste product from the production of platinum.

Experiments with platinum ores

In 1803, William Hyde Wollaston discovered palladium while experimenting with platinum ores. The British scientist named the metal after the asteroid Pallas which had been discovered the year before. This, on the other hand, was named after the Greek goddess Pallas Athena. Shortly thereafter, Wollaston made a further discovery: rhodium - the highly reflective and corrosion-resistant element. Palladium became known primarily as an important catalyst for chemical reactions, crowned by the 2010 Nobel Prize in Chemistry for palladium-catalysed cross-coupling reactions.

Rare precious metal attracts thieves

Although palladium deposits can be found across the globe, the majority of its production comes from Russia, South Africa and North America. In 2018, global mining production of this rare precious metal was estimated to be around 210 tonnes. In comparison, global gold production that same year amounted to approximately 3,260 tonnes. As the reserves of pure palladium are largely exhausted, the precious metal is mined in most cases, in conjunction with platinum and extracted from nickel and copper ores. In addition, recycling plays an increasingly important role in meeting demand, given that palladium can be recycled as many times as necessary. In this regard, catalytic converters/cats are a sought-after source of recycling valuable precious metals such as palladium. During the time when the price of palladium temporarily exceeded the price of gold, the Wall Street Journal reported an increase in car thefts in the U.S. involving the removal of catalytic converters.

Harder than platinum

Palladium and platinum belong to the same chemical group as well as exhibiting visual similarities. Palladium, however, is harder than platinum, easy to process and has a lower melting point (1,554.9 °C). Palladium, in contrast to platinum, is a rarer precious metal and used in the production of exclusive jewellery, wristwatches and white gold alloys. In 2016, only around 9 tonnes of the initial production of Palladium was processed by the jewellery industry worldwide, in comparison to 68 tonnes of platinum.

Palladium’s time has arrived in the automotive industry, more precisely, in exhaust catalysts for petrol-engine vehicles. Of the 9.4 million ounces in demand in 2016, 6.3 million ounces were destined for catalytic converters. Electronic applications came in second with 1.2 million ounces, where the white metal is used in fuel cells as an electrode material, for example, improving connectivity and reliability in smartphones. The precious metal also acts as an excellent storage material for hydrogen, since under suitable pressure conditions, palladium can absorb up to 1,200 times its volume of hydrogen, making it an attractive component for fuel cells used in hydrogen cars.

Acquiring palladium

Palladium is not only available as jewellery (should one wish to possess this exotic metal), but also as stamped bars and (somewhat more common) as bullion coins. In the 1980s, countries such as Australia and China began to issue palladium coins in limited editions. The first palladium bullion coin in Asia comes from the People's Bank of China and features a panda with a bamboo branch in addition to the year 1989.

XPD at record high

Investors love precious metals such as palladium, which are used extensively in industry and for which supply and demand from production determine the value according to traditional market rules. Palladium can be traded globally via the so-called spot market, where cash transactions must be carried out immediately or within two trading days. Additionally, palladium can also be traded on futures markets, such as on New York’s NYMEX (COMEX). Daily fixings are also held on the London Bullion Market and the London Platinum & Palladium Market (LPPM), where fixed reference prices are determined. Internationally, palladium’s price is usually quoted in US dollars (per ounce) and listed on stock exchanges under name XPD.

Until the beginning of 2001, persistent supply shortages affecting Russia (the main producer), caused the price to climb to an all-time high of 1,090 dollars, and subsequently, sharply declined over the years that followed. In most recent years, an international scandal has played a part in the recent explosion in the price of precious metals. The "Frankfurter Allgemeine Zeitung” is just one example of a publication reporting on the diesel scandal as a price driver: “Because of this, demand for vehicles with petrol engines and catalytic converters has increased, which, in turn, could have an impact on palladium demand”. The Vienna-based newspaper "Die Presse" also writes that it is especially the Russians who have profited from the palladium boom. In mid-March, for example, Roman Abramovich sold shares in the Russian mining group Norilsk Nickel worth 551 million dollars. Norilsk Nickel is the world's largest producer of nickel and palladium with mining operations in five different countries.

After a rapid rise in prices in March 2019, the price of palladium subsequently fell again, leading some analysts to call for the end of the hype surrounding this exotic precious metal, and others of a necessary correction. The strong dependence on the automotive industry could, however, continue to influence the palladium price, experts are suggesting.

Not something for stock market newcomers

Important for investors in SPE: Palladium is not for safety-oriented investors or for stock market newcomers who panic in the face of rapid zigzag courses. To deal with this exotic precious metal, one needs a good risk-appetite, available ‘play money’ and investment expertise. One should be able to recite the definitions of a commodity future, cash market and fixing (see above) with their eyes closed. In addition, there are risks associated with products through which private investors generally gain access to the exchange-traded commodity market. The Exchange Traded Commodities (ETCs) and stock certificates offered are generally bearer bonds in which the investor must bear the risk of a possible default on the part of the issuer: A notorious example of this was the cancellation of the Lehman stock certificates in 2008.

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