Forgotten QE3 Remedy: PALL

September 24, 2012

With all the talk about gold these days, it’s easy to forget about palladium.

Gold and silver seem to attract all the attention in this precious metals bull market, but the oft-overlooked ETFS Palladium ETF (NYSEArca: PALL) has been quietly moving higher as well.

In some ways, palladium is the Theodore Roosevelt to gold’s Franklin Delano Roosevelt. The less-publicized and underappreciated precious metal has been a rock star over the past month, slightly underperforming gold over that period.


Clearly, investors expecting another round of pushing on the string—or QE3, or whatever the Federal Reserve is calling it these days—were buying not just gold but palladium, and in droves.

For whatever reason, that has not led to any meaningful uptake in new PALL assets. In fact, the fund saw outflows of just under $1 million of its current $528 million asset tally in the past month even as price appreciation pumped up its total assets from $480 million in the past month. So investors were bidding up palladium, but not via the ETF wrapper.

The question is, Why not?

Part of it can be explained by the fund’s relatively high cost. PALL comes in at 0.60 percent, while SPDR Gold Shares (NYSEArca: GLD) and the iShares Gold Trust (NYSEArca: IAU) come in at 0.40 basis points and 25 basis points, respectively.

Also, PALL’s 16 basis point average spreads are 16 times wider than those carried by GLD, and more than double the spread of IAU. Even the iShares Silver Trust (NYSEArca: SLV), which has a 50 basis point expense ratio, is a cheaper round-trip option when you consider its 3-basis-point trading spreads.

But if you’re looking for long-term exposure to palladium and are able to spread the trading cost of PALL across many years, the round-trip cost isn’t nearly as onerous.

Moreover, if you are an institution looking to trade a creation unit’s worth of PALL or even making a block trade of 25,000 shares or more, you can, by working with a market maker, probably get good execution without paying a huge markup.

The bullish case for palladium also goes beyond monetary policy.

Those betting on global demand growth in addition to higher inflation will find palladium a worthwhile choice.

Half of the current production of palladium goes to catalytic converter fabrication, a key component in automobile manufacturing.

The expected pickup in demand for automobiles from the emerging markets of the world will continue to be a driving force in setting future palladium prices.

In fact, palladium is used in the manufacturing of nearly 25 percent of all goods. Those uses are wide-ranging, from consumer electronics to jewelry manufacturing—fittingly enough, as a replacement for gold!

And if you believe that the global economy is merely going through a lull, and that Fed Chairman Ben Bernanke’s efforts to fuel economic growth will lead to inflation, you get a double-headed monster of potential returns.

That’s not to say owning PALL is without risks.

If the global economy is entering a prolonged period of stagnation or recession, the demand for palladium is likely to suffer, putting downward pressure on prices.

Of course, economic theory holds that it is possible to have negative growth and inflation, an environment known as stagflation. It’s hard, if not impossible, to predict which of the competing market forces would win out: inflation or decreased demand.

Either way, if you believe, as I do, that Bernanke’s increasingly impotent attempts to spur economic growth via newfangled monetary policies will result in excess liquidity finding its way into the prices of real assets, palladium—and specifically PALL—is the option nobody seems to be talking about.



At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at [email protected].


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