Autos Make This Metal Precious

|
Posted: Mar 07, 2011 8:10 AM

The precious metals markets have been rising steadily on fears of growing inflation, global economic uncertainty, and unrest in the Middle East. However, it’s not just the better known precious metals, like gold and silver, that have been going up in value. Palladium, a precious metal known for its industrial purposes and widely used in building catalytic converters for cars, has been in a major bull market as well.

And now it appears that, despite the recent run-up in price, the metal is set to become even more valuable over the next few months, as analysts are now expecting as much as a 15% rise in its value for the coming year. The reasons are fairly obvious. As of 2007, Russia accounted for 44% of the world’s palladium production, followed by South Africa. Together, the two countries make up 80% of the world’s total supplies of the metal. And while the exact amount of palladium that Russia has in reserves is a closely guarded state secret, recent reports of lower volume from mine production, along with restrictions on the export of the metal from that country, have analysts worried that the material could become much harder to come by in the near future.

Since virtually every modern automobile built the world over requires a small amount of palladium or platinum in order to help power their catalytic converters, there is a steady need for the metal. With Russia beginning to slip as a supplier of the material, South Africa, a much poorer country where palladium mines run quite deep and extracting the metal is expensive, has attempted to pick up some of the slack.

According to Darren Lekkerkerker, manager of Fidelity Investments Global Natural Resources Fund, as quoted in Canadian Business Magazine, the problem is that South Africa “doesn’t have enough power to facilitate [such a large] increase.”

Since 2008, palladium has enjoyed a steady rise in value along with other precious metals, seeing a fourfold increase in value and trading at over $800 per ounce as of this writing. However, unlike most other precious metals, palladium has seen almost all of its run up in value coming from industrial investors who are purchasing stocks of the metal for the purpose of building machinery rather than hoarding the material as a hedge against an ever weakening dollar, as gold and silver investors tend to do.

This difference makes palladium a potentially more valuable commodity since the market for the material is not nearly as dependent on the Federal Reserve’s monetary policy as gold and, to a lesser extent, silver are for seeing a run up in valuations.

Three Ways to Cash in on Rising Palladium Prices

Investors interested in gaining exposure to palladium can make use of many of the same options as gold and silver investors, including purchasing bars of the metal, purchasing ETFs (Electronically Traded Funds), or by purchasing stocks of palladium mining companies.

While taking delivery of physical palladium is our favorite way to play this metal, there are a few good ways to gain exposure in the financial markets.One stock that I like is the Stillwater Mining Company (SYMBOL: SWC; NEWS; CHART).

Stillwater develops, extracts, processes, refines, and markets palladium from its home state of Montana. Shares of the company are up over 20% so far in 2011, with nearly 7% of those gains coming in the last week after a recent pullback in the palladium prices. And over the last 12 months, SWC has returned a whopping 100% in gains. The company is poised to continue gaining as the price of palladium continues to rise.

Another way to play palladium prices would be through the ETFS Physical Palladium Shares ETF (SYMBOL: PALL; NEWS: CHART). This ETF seeks to mimic the price movement in spot price in palladium, minus fees.

I believe that palladium will rise dramatically in the coming years as demand continues to tighten supplies. However, given the recent surge in palladium prices, waiting for a pullback in the price would be advisable.