ETF Pegs Palladium Prices

08/15/2013 8:00 am EST

Focus: ETFs

Tom Bishop

Founder, BI Research

This company, as its names suggests, holds palladium in physical form, with the goal of tracking the price of the metal; despite the volatility, we continue to rate the ETF a buy, says Tom Bishop of BI Research.

The annual expense of the ETFS Physical Palladium (PALL) is about 0.6% per year, so as the years pass, the difference between one tenth of the palladium price, and the price of this ETF, would be due to the accumulation of that expense.

Shortly after PALL was recommended, in early April, we had to endure a trip down into the mid-$600s for the price of palladium. Since then, the price has rebounded all the way to $765, where it stood as recently as June 10, then back into the mid-$600s again, and then back to $730.

The perplexing trip back down into the mid-$600s earlier this summer was likely due to the lack of an expected strike by miners, amidst current contract negotiations in South Africa.

Or, perhaps there is some illogical link to gold's drop (which would make no sense since palladium is an industrial metal primarily used in catalytic converters).

The more recent reversal of the ETF back to $730, as best I can tell, is because some miners subsequently did go out on strike in South Africa. And it is a bigger deal than you might think, because some believe the sides are miles apart, and therefore, it could be a long strike. I am not sure how much production is affected.

The drivers remain in place and odds favor higher palladium prices going forward. Again, most notable on the demand side, historically 70% of palladium usage goes to catalytic converters, and auto sales are doing very well in the US and globally.

Furthermore, in countries closer to the emerging end of the scale, now choking with pollution, demand is growing for this reason as well. So a twofer on the catalytic converter demand front.

Meanwhile, Russian stockpiles have dwindled to almost nothing and can no longer help to keep supply and demand in balance. Russia gets its palladium from the mining of nickel and the average grade is declining.

South Africa supplies approximately an equal percentage of global production, (40% each), but here again it is getting its palladium from mining platinum.

And it is running up against labor problems, rising wages, and issues with electricity and water. Costs are climbing and it is closing down some production is not climbing.

Meanwhile, there are only two relatively small palladium mines in the world where that is the primary metal being mined. In other words there is virtually no palladium—only pedal to press down on to increase production.

So, I repeat all this because it is worth keeping in mind when deciding if you want to have an oar in the water here. I vote yes and the ETF remains a buy.

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