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Investing in Palladium Futures

Is Palladium a Better Investment Than Gold?

Written by Geoffrey Pike
Posted August 22, 2014

Palladium futures recently hit a 13-year high on concerns that global supplies will not keep up with demand.

The price of the metal is up over 20% this year and briefly hit the $900 mark in trading.

A five month-long strike in South Africa — the world's second-biggest supplier of palladium — just ended in June. And the U.S. recently imposed sanctions against Russia — the top supplier — adding more uncertainty to already low supplies.

While palladium has been a great investment this year, it has not hit its all-time high. That occurred in early 2001, when the metal went to around $1,100 per ounce. That was also a result of disruptions in supplies coming out of Russia.

Palladium is something of an industrial metal. It is used in a lot of industries, including jewelry and dentistry. But it is used most today in the automobile industry, particularly in catalytic converters.

What About Gold and Silver?

While palladium is considered a precious metal like gold and silver, the metals differ quite a bit, both in use and as investments.

Like palladium, gold and silver can also be used as industrial metals to some extent, but they have other characteristics that make them unique.

Gold and silver are highly correlated, tending to move up and down together. Silver is more volatile than gold, generally speaking, but the two metals typically move in the same direction. It is not even common to see one go up in price and the other go down in any given day. When it does happen, it is usually small price movements.

While there is some correlation between the price of palladium and the prices of gold and silver, it is not nearly as strong. Palladium will react to changes in supply and demand, as we are seeing now with lower supplies.

Gold and silver are different than palladium and every other precious metal in the fact that they have a long history of being used as money.

Even though gold and silver are no longer commonly used as a form of money, the marketplace still recognizes this history. If fiat currencies were not essentially forced onto everyone, then the market would likely choose gold and silver as money again.

There is a reason central banks around the world still hold gold as reserves: because of its long history as a form of money, and because it symbolizes wealth. These days, it may also be because of the unreliability of fiat currencies everywhere.

Gold — and to a lesser extent, silver — is also a hedge against disaster in the world. If a big war is about to break out, the price of gold typically rises.

Despite the U.S. dollar having no gold backing for over four decades, people still respect gold as a form of safety and security.

Supply and Demand

Gold, silver, and palladium all react to supply and demand. If there is a decrease in the supply of a metal without a decrease in demand, then the price will go up to reflect this. It is simple economics.

But there is a particular type of supply and demand that all three metals will react to, although not necessarily in the same proportion. I am talking about the supply and demand of money — in our case, U.S. dollars.

If the supply of dollars goes up, as has been the case over the last five and a half years, then the price of precious metals, or most anything else, will eventually go up, if all else is equal. If the demand for money goes up, which I believe has also been the case over the last five and a half years, then prices will tend to go down, all else being equal.

This is the main reason there is some correlation between palladium and the other metals. They will all tend to go up in price over the long run, assuming the money supply continues to increase.

However, in times of great turmoil, when the money supply is rising and the demand for money is falling, gold and silver are likely to outperform all of the other metals.


Many people mistakenly believe gold and silver prices go up with general price inflation. But this isn’t really the case.

Gold and silver prices can stay flat or even go down during times of mild inflation. If the market is not expecting inflation to pick up, then demand for the metals can be low. This is what happened during much of the 1980s and 1990s.

On the other hand, if price inflation is high and there is great fear of it, then gold and silver will usually go up at a much greater rate than the actual inflation rate. We witnessed this in the 1970s — the metals not only kept up with inflation but far exceeded it.

Therefore, if we hit another 1970s scenario, I would expect gold and silver to be the best performers, unless there happens to be a major supply disruption with one of the other metals.

Invest in Palladium?

We are not in a 1970s scenario — at least not yet. Despite the high monetary inflation, price inflation has been relatively low. I believe this has kept demand down for gold and silver.

During times like this, it is useful for investors to look at other opportunities, such as palladium. You will get more volatility there. This means more risk but also potentially higher rewards.

You should always have some gold in your portfolio to protect yourself from inflation and a world disaster. This should be part of your core holdings.

But if you are looking for some speculative opportunities, then a metal such as palladium is worth your attention. You can trade palladium in the futures market, but only experienced futures and options traders should consider this.

For a long-term play, you can actually buy physical palladium in the form of bars or coins.

If you are looking for something more short-term that you can buy and sell quickly, there is an exchange-traded fund (ETF) that reflects the performance of palladium bullion. The trading symbol is PALL.

While there is no guarantee that the price of palladium will hit its all-time high of around $1,100 anytime soon, it is seeming more likely these days. The metal is still trading below $900. If it hits its all-time high, there is a lot of profit potential there.

But be sure to keep your gold and silver for the really tough times ahead.

Until next time,

Geoffrey Pike for Wealth Daily

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