Time to Buy Palladium

Brian Hicks

Updated September 11, 2006

While investors are very familiar with gold, silver, and platinum, palladium is often overlooked when considering it as a precious metal for investment purposes.

Palladium is one of a group of six metals often referred to as PGM’s, which stands for Platinum Group Metals. This group includes the well-known platinum and the relatively obscure metals called rhodium, iridium, ruthenium and osmium.

Platinum is 15 times more rare than gold. All the platinum man has ever mined, for example, would fit into a 25-cubic-foot room. Palladium is more rare than platinum.

2010 palladium barsWhat these metals have in common is the ability to serve as a catalyst for chemical reactions, and a very high melting point.

Not surprisingly, the biggest demand for both platinum and palladium comes from the global auto industry, which uses both in the catalytic converters necessary to meet increasingly stringent clean air requirements for the auto industry.

In 2005, approximately 40% of total platinum demand came from the auto industry.

The figures for palladium were even higher; roughly 58% of palladium demand was for auto-catalysts.

Since both are used to reduce auto emissions, platinum and palladium compete with one another on price. Automakers will use whichever of these two PGM’s gives them a bigger bang for their buck.

In early 2001 for example, palladium made a high of $1,090 per ounce. At the same time, platinum was trading for $623 per ounce.

As a result, the auto industry retooled their catalytic converters to use mostly platinum. This process of retooling takes some time, and prices of the two metals adjusted as the switch took place.

The impact is still clearly visible in today’s prices. As I write this, palladium is trading for $341 per ounce, while platinum is trading for a whopping $1237 per ounce.

This imbalance will be corrected as automakers will once again retool their production lines to accommodate the cheaper palladium. palladium hit a low of $184 an ounce and appears to be headed significantly higher. At some point the gap between platinum and palladium will narrow.

Palladium has another advantage over platinum. A catalytic converter works only when hot, but 90% of tailpipe emissions occur before it heats up. To cut warm-up times, carmakers have moved the converter closer to the engine. Palladium, which is more heat tolerant than platinum, is better suited to this design.

Another factor to consider is this…

South Africa and Russia are the biggest suppliers of palladium and both have been dumping all they can produce on the market.

Palladium is priced in dollars and today’s low prices mean not only are both nations getting paid less for their metal, but also the dollars recent drop means they are getting paid less in terms of real value.

With a low palladium price and a declining dollar, how long will it be before these nations re-think their export policies, especially Russia, who accounts for almost 50% of annual global palladium supply?

Russia holds the key to price and it wouldn’t be a surprise to see them hold back supply in order to raise prices.

Palladium Demand

2005 palladium demand by sector

Another reason why palladium prices have remained low is that the Ford Motor Company was convinced in 2001 that the palladium price would stay high and stockpiled 1.8 million ounces.

It has taken the last four years to liquidate this stockpile, which is now almost exhausted.

Once it is fully liquidated, a huge weight on the palladium market will be lifted.

If all that is not enough, perhaps the biggest demand for palladium could come from China, which is home to the fastest-growing automobile market in the world.

In China last year, the number of cars on the road jumped by nearly 50%. Sales of domestically produced automobiles soared by 70%. The number of cars on the road is expected to increase at least 10% per year through the rest of the decade. The number could even be bigger because the Chinese are discovering new car financing. Imagine what will happen when 1.3 billion people discover no money down, five-year car loans!

At the same time, China has announced its intentions to impose strict emission standards prior to the 2008 Olympics, to present modern China to the world.

The last thing they want is a third world haze of pollution enveloping Beijing and other Olympic venues. More stringent emissions standards mean more and better catalytic converters and that means more platinum and palladium.

Palladium Stocks

Since most of the world’s palladium comes from South Africa and Russia, investing in palladium stocks can be a bit tricky. There are just a handful of large North American palladium producers including Stillwater (NYSE: SWC) and North American Palladium (AMEX: NAP)

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 (NYSW: SWC) 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!

The last time palladium was entering a similar bull market, prices rapidly surged from $160 to over $1,100 an ounce — a 588% increase!

Fortunately, palladium prices have pulled back quite a bit, allowing for a buying opportunity. And if we have a similar bull market for palladium, prices could hit $3,438 an ounce!

With palladium prices nearing $3,500 an ounce, the investment gains from this small stock will start to increase exponentially…

I’ve already taken up too much time here. There’s a lot more to this story that I want you to hear.

I haven’t even begun to touch on how palladium prices are about to be forced higher by the global auto industry’s “big switch.”

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

Good Investing,

Greg McCoach

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