Historically, precious metals investing for U.S. investors has been limited to gold and, to a lesser extent, silver. But recent innovation in the space has doubled the available resources; earlier this year, London-based ETF Securities launched the ETFS Physical Platinum Trust (PPLT) and ETFS Physical Palladium Trust (PALL), the first physically-backed ETFs offering exposure to platinum and palladium. The reception to these products has been overwhelming; investors poured over $600 million in assets into these two funds in less than two months [For updates on all new ETFs, sign up for the free ETFdb newsletter].
While every commodity investor knows the difference between gold and silver, the distinguishing characteristics of between platinum and palladium are less obvious, but still very important. Most people know that platinum and palladium are crucial components for the automotive industry, but there are several other key differences that are often overlooked when considering an investment in the “other precious metals.” Below, we highlight three critical differences between the two that investors should keep in mind when deciding which platinum group metal may best fit their objectives [Download 101 ETF Lessons Every Financial Advisor Should Learn].
1. Price and Supply
Platinum and palladium are extremely rare metals: only about 7 million ounces of platinum are mined every year while palladium production totals just 8 million ounces annually. By comparison, more than 76 million ounces of gold are produced each year and nearly 680 million ounces of silver. Clearly, both of the metals are very rare, which is part of the reason for their high relative values: palladium currently trades at about $450 an ounce while platinum trades at nearly $1,600/oz. As such, any new technological advances (such as the increase in PGM recycling in recent years) or supply disruptions can have a major impact on prices [see 1,400+ ETFdb Realtime Ratings].
Although both metals have a variety of uses, more than 50% of each goes into automotive catalytic converters that cut down on emissions of harmful gasses. Besides cars, platinum has become very popular as a high-quality jewelry input, while palladium finds its second highest demand from electronics (jewelry is a distant third). However, as the price of platinum rises (it’s now significantly more costly than an ounce of gold), many are turning towards a combination of gold and palladium for jewelry purposes in order to give the same effect as platinum but at a much lower price. This may help boost the price of palladium in the near future. However, the demand for automobiles, which seems to be getting back on track, will likely remain the main driver of these metals for quite some time.
Both metals are only found in a select few locations: South Africa, Russia and North America make up virtually all of the production for these two metals. However, there are some key differences between the occurrence of the metals. South Africa produces more than 80% of the world’s platinum, meaning that any disruption of the mining facilities or political instability could have a major impact on the price of platinum. Palladium is slightly less concentrated; its largest producer is Russia, accounting for roughly 50% of global production. South Africa is the second largest producer, providing another 33%.
These differences between the metals seem minor, but the impact on the risk/return profile can be significant: since launching in early 2010, PPLT has lost nearly 1%, while PALL is up about 6.2% over the same period.
Disclosure: No positions at time of writing.