ETF Of The Week: Palladium ETF Shines

September 28, 2018

In the world of precious metals, a big story is unfolding, unnoticed by most investors—even most commodity hounds.

Palladium, the industrial metal in precious metal's clothing, is quietly rallying, its prices hovering near all-time highs.

Yet investors have spurned the metal. Holdings in global palladium exchange-traded products are near nine-year lows, while the $141 million ETFS Physical Palladium Shares ETF (PALL), the market's only palladium ETF, has actually seen outflows year-to-date of $91 million.

The big question is, why?

Precious Metals Workhorse

Unlike gold, which has limited industrial use, palladium is a workhorse of a precious metal. It's used for a very specific industrial purpose: to make more emission-friendly catalytic converters for automobiles.

As cars increasingly go greener—China, in particular, has aggressive emission reduction targets it plans to meet by 2020—automakers will need to produce more and more catalytic converters.

In addition, the increasing occurrence of climate-related disasters—wildfires, earthquakes, hurricanes and so on—has spurred consumer demand for new automobiles to replace ones that were lost or destroyed.

That, too, has fueled demand for new catalytic converters and, in turn, palladium.

Prices Rise On Tight Supply

On Thursday, spot palladium traded at $1,074.62/oz, or just 6% off its all-time high of $1,139.68/oz. Naturally, PALL has rallied, too, rising 14.4% in the past 30 days.

Over the past month, PALL has proved the second-best-performing ETF, second only to the marijuana-tracking ETFMG Alternative Harvest ETF (MJ) (read: "ETF Of The Week: Marijuana Stocks Surge Higher").

 

Source: StockCharts.com; Data as of Sept. 27, 2018.

 

Palladium is sky-high right now because supply of the metal is so tight—as it has been for most of the decade.

The current U.S.-China trade dispute has exacerbated that tight supply. Though neither country has levied a tariff on palladium metal, both have levied import duties on industrial metals such as aluminum and steel.

As a result, some buyers have begun buying up raw materials, like palladium, as a precautionary measure against future tariffs, Bloomberg reported earlier this week. That has helped push palladium's prices up, even above other precious metals, which have lagged due to the strong U.S. dollar.

Investors Wary Of Tariffs

But the U.S.-China trade war has proved to be a double-edged sword for palladium. Both the U.S. and China have announced hefty import taxes on cars made by the other country, which will likely crimp future demand for new automobiles. That could have a ripple effect to those countries' trading partners—which are everybody.

If and when demand for new automobiles drops, there will be less need for all related metals, including palladium.  

Another potentially complicating factor for palladium demand is that it can also be used to make these kinds of catalytic converters.

Historically, platinum was too expensive to use for that purpose. But given the rise in palladium prices, platinum is now at its cheapest point compared to palladium in 17 years. That has led some automakers to contemplate making the switch.

It'll be interesting to see how this all shakes out for PALL in the months to come.

PALL has an expense ratio of 0.60%.

Contact Lara Crigger at [email protected]

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