Palladium ETFs underperformed gold by a wide margin in 2011 but have held their own in recent months on an improved outlook for the global economy.
A potential shortfall in physical palladium supply has helped boost investment appetite for the physically backed palladium ETF. Meanwhile, fund providers are hoarding more of the precious metal.
ETFS Physical Palladium Shares (NYSEArca: PALL) is up 1.9% over the past month, even as other precious metals were showing negative returns.
In the first quarter, manager ETF Securities saw inflows into PALL and ETFS Physical Platinum Shares (NYSEArca: PPLT) that were seven times greater in ounces than its gold product, ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), said manager director Will Rhind.
“Investors took the opportunity to invest in platinum and palladium over gold as economic growth sentiment in the U.S. improved,” Rhind said.
Investors should be aware that despite its “precious metals” designation, palladium is primarily used in industrial applications and is likely to fluctuate with economic ups and downs, says Morningstar analyst Abraham Bailin.
Aside from electronics, clean energy tech and jewelry, palladium is mainly been used in the autocatalyst for gasoline engines, which has contributed to the growing demand as the world economies improve and more people purchase new vehicles. More recently, palladium has begun turning up in diesel engines, which typically use platinum.
Spot palladium prices are back at around $674 per ounce. Palladium is closing in on its $681 50-day and $684 200-day resistance levels. In comparison, platinum is trading at around $1,563 an ounce.
In 2012, global carmakers are projected to produce 80 million vehicles, with 6.24 million ounces of palladium sitting in their engines, or 6% more than last year and a new record high, reports Nathan Slaughter for StreetAuthority.
On the supply side, 2012 may be the sixth consecutive year of declining global mining production, with Russia shifting to nickel production and South Africa bogged down by energy and labor problems.
Consequently, Russia’s strategic stockpile has been a primary source of supply; however, this source may be depleted by 2014. According to Barclays, Russian shipments may drop to 300,000 an ounce this year. Market observers are already estimating a 215,000 ounce shortage for 2012.
The PALL ETF has begun hoarding palladium in anticipation of the dip. The fund now holds 58.9 metric tons of palladium, or a 14% increase in holdings year-to-date.
Consequently, palladium forecasters believe prices could easily hit $850 an ounce at the end of the year, about a 33% increase. In comparison, analysts believe gold could gain 15% and silver add 13%. [Palladium ETF May Soon Outshine Other Metals]
Furthermore, Sprott previously filed for a physical palladium ETF. In the months up to the launch of the fund, the provider will also need to buy the necessary amount of physical palladium to support its share price, further diminishing the amount of palladium circulating in the markets. [Sprott Files Physical Platinum and Palladium ETF]
ETFS Physical Palladium Shares
For more information on the precious metal, visit our palladium category.
Max Chen contributed to this article.