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Investing in Palladium

Big Potential In "Little Platinum"

Written by Brian Hicks
Posted November 2, 2009

Palladium is an underdog among precious metals. But it has some unique attributes that set it apart from the "big three" — gold, silver, and platinum. So if your goal is to have a diversified portfolio of precious metals, palladium could be a good choice.

Before you go out and buy palladium bullion/coins, it's important to realize that prices for this metal are quite volatile, and fluctuations are more dependent on industrial demand than metals like gold, where industrial use is considered a secondary market mover by many investors.

In 2001, the price of palladium peaked at over $1,100 per ounce. It currently trades around $320. A drop like that will pique the interest of contrarian investors, and cause heartburn in more conservative ones. . .

Rightly so, on both counts.

Palladium is a more speculative play, and therefore research and risk tolerance are prerequisites to investing.

For now, let's take a look at what palladium is, how its price moves, and how you could benefit from palladium in your portfolio.

Palladium is a member of the platinum metals group and it has many industrial uses (more below). I would classify it among the riskier metals as an investment class, but the potential upside is great. As the world continues to print money in an attempt to stimulate economies, palladium could benefit from both increased industrial demand and inflation.

I don't like this inflation-driven "recovery" scenario, but am positioning myself for the possibility.

What is Palladium Used For?

The primary industrial use of palladium is in the manufacture of catalytic converters (devices that clean automotive exhaust). This unique metal converts harmful gases, like carbon monoxide, into more benign ones like carbon dioxide. The decline in car sales is partially to blame for the fall in palladium prices. But with governments artificially stimulating auto-sales around the globe, palladium prices should with demand.

Growing Popularity in Jewelry

Palladium is also widely used in the jewelry market. It's an essential ingredient of white gold and is a cheaper alternative to platinum. Palladium is very similar to platinum, with the main difference being that palladium is a bit less dense. It is used in fine jewelry and is starting to replace its more expensive cousin as the base metal in engagement rings and other products. It's easy to see why jewelry makers and consumers like palladium: It sells for around $320/ounce, compared to platinum at $1335/ounce.

Palladium is also widely used in the fields of electronics, dentistry, and medicine.

According to Stillwater Mining:

Palladium-containing components are used in virtually every type of electronic device, from basic consumer products to complex military hardware. Although each component contains only a fraction of a gram of metal, the sheer volume of units produced results in significant consumption of palladium. The largest area of palladium use in the electronics sector is in multi-layer ceramic (chip) capacitors (MLCC). Smaller amounts of palladium are used in conductive tracks in hybrid integrated circuits (HIC) and for plating connectors and lead frames.

Investing in Palladium

Coins or bars are the most common ways to invest in this metal. The Royal Canadian Mint makes beautiful .9995% pure palladium coins that are legal Canadian tender. But they're pretty hard to find these days. A more accessible (and cheaper) option is palladium bars from reputable mints, like Pamp Suisse. I recently bought some of these 1-ounce bars from American Precious Metals Exchange (www.apmex.com), an online metals dealer I've had good experience with. (We have no business relationship.) APMEX has the best prices I've been able to find for small-to-mid level buyers like me.

From what I've seen, they ship what is promised and on time.

Palladium Stocks?

There are few pure plays in the palladium mining world, so investing via common stock is more difficult than gold or silver. The biggest player in the U.S. is Stillwater Mining (NYSE: SWC). They operate a large mine in Montana, which is one of only three large-scale production sites in the world. North American Palladium (AMEX: PAL) is another relatively pure play.

There are a few smaller companies exploring and developing similar nickel-copper-platinum-palladium projects — including one that my colleague Luke Burgess is particularly excited about...

It's a junior exploration and development mineral company with over 100,000 hectares, and it's located smack-dab in between the two largest palladium deposits in North America.

To the west is North American Palladium's Lac des Iles Mine, one of the largest palladium mines in North America. Lac des Iles has 3.7 million ounces of palladium resources and is projected to produce 140,000 ounces next year.

To the east is Marathon PGM's Marathon Mine — containing 2.4 million ounces of palladium reserves plus 3.0 million ounces of palladium resources. It was just bought by Stillwater Mining for $118 million.

Take a look for yourself:

September 2010 Great Lake Map 600x308

These are two of the most important palladium mines in North America.

Every junior palladium explorer wants land around them.

This junior company has already made the discovery of a palladium deposit on one of its many mining claims of 730,000 ounces of palladium-equivalent resources...

But the company is actively working to upgrade and increase its palladium resource base.

The target: 2.6 million ounces of palladium-equivalent resources.

And it's worth 12.6 times more than the company's current market cap.

This means that — once this company becomes resource-heavy and properly valued — share prices could increase 1,163%.

And that's just at current palladium prices!

You can learn more about the global palladium industry and how the auto industry's "big switch" will drive prices even higher by simply clicking here or copying and pasting the following link into your internet browser's address bar: https://www.angelnexus.com/o/web/23291

Russian Stockpiles of Palladium — Potential Problem?

Some of the most productive palladium mines in the world are located in Russia. And their government has not been very forthcoming about levels of production or stock. Some people think Russia's stockpile of the metal is more sizable than the market has priced in, and that it may continue dumping metal on the market to generate cash during a lull in oil prices.

However, it is in Russia's best interest not to release too much metal at once into the market, to ensure prices stay at profitable levels. And Russia doesn't have a monopoly on palladium by any means — there are large mines operating in North America and South Africa, as well. But Russia's dominant status is a factor to consider when investing.

Time to Buy?

Palladium's had a nice run over the last year, and we think it has a lot further to go. However, it may be prudent to wait for a pullback to the $280-$300 level. If the dollar's rally continues for a few more weeks, that should provide a great opportunity to scoop some up. Price fluctuations can work in your portfolio's favor if you're patient. And we'll keep you up to date.

Good investing,

Adam Sharp
Analyst, Wealth Daily

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