What’s Driving The Palladium ETF (PALL)?

by on April 6, 2010 | ETFs Mentioned:

When ETF Securities finally cleared the last of the regulatory hurdles last year and geared up to introduce the first physically-backed platinum and palladium ETFs, investor interest quickly surged. Although futures-based exposure to platinum had been available for several years, exposure to physical bullion prices represents an entirely different asset class–apparently one that investors were eager to access. As the buzz around these funds intensified, it became clear that commodity investors have embraced ETFs as a powerful innovation.

When the ETFS Physical Palladium Shares (PALL) and Physical Platinum Shares (PPLT) hit the market in early January, investors, this anticipation translated into one of the most successful product launches in recent memory. PALL finished the first quarter of the year with almost $270 million in assets, while PPLT topped $500 million. Strong interest in a fund obviously doesn’t guarantee strong performance (UNG’s run during 2009 illustrates this concept very well), but PALL and PPLT have turned in very strong year-to-date performances; recently the palladium ETF was up almost 18% since inception while its platinum counterpart had added about 7%. Both metals have raced ahead of gold, reminding investors that there is more to precious metals than GLD and SLV. The ratio of gold prices to platinum and palladium prices recently hit its lowest level since before the Lehman Brothers bankruptcy, as an ounce of gold bought about 2.2 ounces of palladium, down from a high above 5.0 ounces in February 2009.

So what’s the cause for the impressive run-up in palladium prices in 2010? A number of factors have played a part.

First and foremost, the global automotive industry has returned from the brink of collapse, sending demand for both platinum and palladium surging. These metals are used widely in catalytic converters for automobiles, meaning that a strong link between the health of the car business and prices exists. After an abysmal 2009, car sales rebounded sharply in the first quarter of 2010. Industrywide sales were up about 24% in March to 1.07 million vehicles, while Toyota’s Japan sales jumped 51% for the month.

In addition to rebounds in domestic demand, strong sales in emerging markets have been a boon to automakers. General Motors’ China sales hit a record level in March, surpassing the company’s domestic receipts for the third consecutive month. GM recorded a 68% jump in China sales last month, while competitors weren’t far behind; Toyota posted a 33% increase and Hyundai reported a 47% jump. Since there is no pure play automotive ETF available to U.S. investors (see Who Else Wants A Car ETF?), PALL is one of the best ways to bet on this sector.

The launch of PALL and PPLT has also helped to boost prices. These funds hold about 700,000 ounces of platinum and more than 1.2 million ounces of palladium, representing a material portion of annual supplies (the average annual global supply of palladium totals only about 8 million ounces).

Platinum Held In Check

Despite the recent price surge, palladium remains far cheaper than platinum, explaining its jump in popularity among industrial users and larger price jump so far this year; palladium currently goes for about $500 per troy ounce, while spot platinum is hovering near $1,700 per troy ounce. Concerns about rising cash production costs, production operations, and a lack of adequate power supply in South Africa have also weighed on platinum prices this year, creating a gap between PALL and PPLT (see Three Key Differences Between Platinum and Palladium).

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Disclosure: No positions at time of writing.