Definitive Guide To Palladium ETF Investing: Palladium ETFs 101
In recent weeks, news that London-based ETF Securities was preparing to launch physically-backed platinum and palladium ETFs rolled through the financial markets, causing tremendous excitement among bulls and inflation bugs alike and sending prices of these metals soaring in anticipation. There are currently multiple exchange-traded products offering exposure to platinum through futures-based strategies (see this guide for an in-depth look at these funds), but the proposed palladium ETF is the very first of its kind. These funds have been in the works for quite some time, and have the potential to be very powerful investment options.
Physically-backed platinum and palladium ETFs have been trading on European exchanges for years, but the idea of introducing similar products to U.S. markets caused a great deal of controversy. The global supplies of platinum and palladium are extremely small, totaling only about 6 million ounces and 8 million ounces per annum, respectively. By comparison, global gold production from mines usually exceeds 2,000 tonnes annually.
With such a small supply base, some feared that the introduction of physically-backed ETFs would result in “hoarding” of the metals. After ETF Securities filed for approval to launch such funds, “there were concerns that the market for platinum was too thin, and that hoarding by the ETF would create a shortage in the physical metal, which is used in everything from catalytic converters to jewelry,” according to Index Universe. “At least one platinum mining firm came out against the concept, worrying that hoarding would drive up prices in the short term and hurt long-term industrial demand.”
In December 2009, the SEC approved a rule change to list and trade shares of the palladium ETF. Shortly thereafter, ETFS announced that financial firm Susquehanna Capital Group had agreed to “seed” the new fund, committing to buy 100,000 shares. Sure enough, indications that a launch of the platinum and palladium was imminent moved the market for the metals and the companies that mine them. “[The anticipated launch] has investors jockeying for position in related mining equities, betting that bullion-buying by the new ETFs will help drive up the prices of the underlying metals and support those shares,” said Matt Hougan.
Unlike gold and silver, palladium wasn’t discovered until the 19th century, when an English chemist named the metal after a Greek goddess. Palladium is one of the six platinum group metals (PGMs), a collection of elements with unique chemical properties used in a wide variety of products.
Palladium has a number of industrial uses — it is found in computers, mobile phones, and LCD televisions — but more than half of global supply goes into the manufacture of catalytic converters, a key component of exhaust systems for automobiles. As such, demand for platinum is generally correlated to the health of the global auto industry.
Russia is the world’s largest producer of palladium, but its contribution to total supplies has declined significantly over the last decade. In 1999, Russia mined 5.4 million ounces of palladium, or 65% of the global total. By 2008, production had slipped to 3.7 million ounces, or less than 45% of world supplies. In addition Russia, South Africa, Canada, and the U.S. are the biggest palladium-producing countries.
As prices of PGMs soared in recent years, recovery of these metals from old automobiles has become an increasingly common activity. Supply from this activity increased from only 195,000 ounces in 1999 to more than 1.1 million ounces in 2008 and is expected to rise further, particularly following the Cash For Clunkers plan implemented in the U.S. in 2009.
Palladium Price Drivers
After rising above $1,000 per ounce in 2001, palladium prices declined for the next two years, falling below $200. As of January 2009, palladium was trading at about $430. Because palladium is used in various industrial applications and has appeal as an inflation hedge, prices for the metal can be impacted by a wide variety of factors.
Price drivers of palladium include:
- Production levels in South Africa, Russia, and the U.S.
- Hedging activity and unwinding by palladium producers and consumers
- Inflation expectations among investors
- Geopolitical tensions in palladium-producing regions
While the manufacturing sector accounts for the vast majority of palladium demand, the metal is also becoming popular as an investment. Physically-backed investment demand, including coins, bars, investments held in allocated accounts and exchange traded products, has steadily risen over the last decade and represented approximately 5% of total reported demand in 2008.
Palladium ETF Options
The ETFS Palladium Trust (PALL) is the only option for U.S. investors to gain exposure to this commodity. According to the prospectus, the investment objective of PALL is to reflect the performance of the price of palladium, less expenses of the Trust.
While some trading occurs in London, palladium generally trades on a loco Zurich basis, meaning that the underlying assets of PALL will be held in a vault located in Switzerland. In this sense, PALL is similar to the physical gold product offered by ETFS, the Physical Swiss Gold Shares (SGOL).
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Disclosure: No positions at time of writing.