While gold bullion may be losing its luster in investors’ eyes, palladium and the related exchange traded fund have shined this year and are among the best performing commodities year-to-date.
The ETFS Physical Palladium Shares (NYSEArca: PALL), which tracks palladium price movements, has gained 27.2% as palladium surged to $860 per ounce from $709 per ounce at the start of the year.
“Given the strong run-up and palladium’s historical volatility, short-term price risk remains elevated, but given the supportive market balance, palladium’s outlook remains favorable over the medium term,” Maxwell Gold, Director of Investment Strategy at ETF Securities, said in a research note.
Unlike other precious metals that see steady demand from jewelry and safe-haven investments, palladium has surged this year on increased industrial demand. Palladium is a component of automobile catalytic converters, or auto catalysts, an emissions control device that converts toxic gases and pollutants in exhaust gas to less toxic pollutants.
Gold argued that as more global consumers, especially a growing middle-class in developing countries, purchase gasoline cars, demand will increase for palladium-based catalytic converters. For example, China, India and other emerging countries will become key growth areas as emissions standards tighten, especially as these countries become more industrialized and realize the hazards of pollution along with the rapid growth.
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Moreover, the U.S. is seeing shifting preferences with a greater number of consumers turning to gasoline vehicles and away from diesel, which accounts for the rise in palladium demand relative to platinum demand.
“While there is likely to be a pickup in platinum demand from heavy-diesel trucks, it won’t be enough to counter the decline in demand from light vehicles,” Gold said.
On the supply side, production could limit pullbacks in the palladium market. About 40% of palladium mine supply comes from South Africa, which has experienced a number of pay-related disruptions, and another 40% from Russia. The Russian government had been selling its stockpiles but there has not been any from this source since 2013.
Consequently, Johnson Matthey, a manufacturer of catalysts for emissions controls, projects palladium demand to outpace supply in 2017, the 6th consecutive year of supply deficits.
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