The Shiniest of Them All is Palladium!

I have continued my journey towards diversifying my exposure to non traditional asset classes that are not as subject to the manipulation and impacts of the traditional financial system as a way to have exposure elsewhere in case of another financial crisis.  While cryptocurrencies continue to be my favorite, I have also continued to add exposure to my precious metals as it really does not get any more tangible than the hard assets they can be to sustain value in a portfolio.  As I have continued my learnings of the sector, I have been keeping an eye on trends and prices which led me to this article.

From a price perspective, Palladium has now overtaken all precious metals as the most valuable per ounce and I have not understood why more specifically which has led me to become more interested in the fundamental drivers of value in the market.  As many markets, no matter being a commodify or not, prices are driven my the forces of supply and demand.  It seems that the short term structure of the Palladium market has provided great fundamentals for its continued increase in price.  Supply has been outpacing demand for a number of interesting reasons that could lead to further strength and trends in the overall market.

First, Palladium is used for the production of vehicles in addition to being used for electronics, dentistry and jewelry.  However, given some shifts in the vehicle market, Palladium has seen an increase in demand which has limited its supply for similar reasons.  It is one of the main metals used for pollution control in gas-based vehicles.  As China has increased its pollution regulation and other areas of the world have reduced their demand for Diesel engines due to the emission cheating scandals, Palladium has been the main raw material for the segment which has also been led by strong demand for vehicles.  

The interesting side is supply as most metals are almost immediately met by supply when price increases.  However, Palladium is a byproduct of Platinum which has not experienced the same demand due to the same issues noted.  Therefore, producers have been slowing production because of the decrease demand in Platinum which has led to a shortage of supply of Palladium.  This is a perfect scenario for increased prices as the lag between production and market are longer for a byproduct like Palladium.  While electric cars and alternative technologies will be a longer term challenge, it will take time for these aspects to balance the economics of the commodity.

Lastly, speculation has also fueled these gains as it has been heard that China is stockpiling the precious metals.  This has also led to a large increase of long positions in ETFs and funds that specialize in the metal as well.  In all, it seems like Palladium’s reign over the precious metals, including Gold, will last longer than usual.  Unlike Gold, Palladium is consumed more than it is stored which could lead to continued constraints in supply.  Investors are now only starting to look at how to gain exposure to it so it still may be an interesting opportunity at this time!