In contrast to gold's reputation as a monetary metal, palladium is seen primarily as an industrial metal. Its main use is as an autocatalyst in vehicles, which accounts for about three-quarters of total demand for the metal. Autocatalysts reduce vehicle pollution and are often mandated by governments.
As global vehicle sales have surged on the back of emerging markets such as China, the demand for palladium has likewise surged. Demand for palladium in the autocatalyst segment has nearly doubled over the past decade, according to data from Johnson Matthey.
The supply outlook for palladium has also supported prices. South Africa, the world's second-largest producer of the metal, has been crippled by labor unrest over the past few years. In fact, a four-month strike is still ongoing in the country as of this writing.
The situation isn't much better for the world's larger producer, Russia. Aside from the risks to output from the current geopolitical situation with Ukraine, Russia was already seeing a big drop in its palladium production. Over the past 10 years, Russian supply of palladium has nearly halved.
Bull Case: The trends of rising demand and falling supply will keep upward pressure on palladium prices, which may eventually break the $1,000/oz mark. Potential sanctions on Russia will merely accelerate the rise.
Bear Case: Labor issues in South Africa are resolved and/or global economic growth sputters, reducing auto sales and palladium demand.
Prediction: Palladium's bull trend will continue for the foreseeable future. The ETFS Physical Palladium (PALL | A-100) offers investors easy access to potential price gains in the metal.