Palladium ETF May Gain on Russian Turmoil, Clean Energy Demand

With a recent military insurrection and an ongoing, ill-conceived war with Ukraine, not much is going in a favorable direction for Russia lately.  
Also consider the falling price of palladium, a precious metal for which Russia is the world’s biggest producer. The catalytic converter material’s price has dropped more than 60% since Russia’s invasion of its neighbor in February 2022. 

Still, falling prices and rising demand in environmental applications may mean the price is primed for a turnaround, even if things continue looking bleak for Russia. 

PALL 

The Aberdeen Standard Physical Palladium Shares ETF (PALL) holds physical palladium bullion, exposing investors and traders to the rare precious and industrial metal without venturing into the futures arena or owning physical palladium bars or coins.  

Palladium futures and PALL reached all-time highs in March 2020 at $3,380.50 per ounce and $298.21 per share. The record peaks occurred as Russian troops crossed the Ukrainian border, igniting supply fears. 

Since the March 2022 high, nearby palladium futures prices have plummeted, reaching the most recent $1,218.80 low in June 2023. PALL fell to $111.97 per share, 62% below the March 2022 high.  

The sell-off and Russia’s leading position in palladium mining could make PALL a bargain at the current price level. 

Source: Statista 

The above chart highlights Russia produced 88 metric tonnes of palladium in 2022, eight more than second-place South Africa. Meanwhile, the total worldwide mine output in 2022 was 210 metric tonnes. Russian palladium is a byproduct of nickel production from Siberia’s metal-rich Norilsk region. 

A Green Metal 

Palladium is the metal of choice in automobile catalytic converters, as its density and heat resistance suit the technology that cleans toxins from burning carbon emissions. It’s also required by fuel cells that generate power, and is used in jewelry, dental fillings and electronic components.  

Palladium demand soared over the past years as the world addressed climate change. After trading below $500 per ounce in early 2016, the price soared to a record $3,380.50 after the invasion of Ukraine.  

Turmoil and Supply 

Russia’s relations with the U.S. and Europe are at their worst level in decades, and at the same time, internal turmoil may also be affecting commodity production and logistics.  

The Wagner Group’s recent uprising has weakened the Kremlin’s status. It could lead to further attempts to overthrow the Putin government as Russians grow weary of what it’s called the “special military operation” in Ukraine. War can distort commodity prices and flows, and while retaliation against sanctions threatens palladium flows, the economic and social consequences could cause production to decline.  

The above chart highlights PALL’s 62% drop from $298.21 in March 2022 to $111.97 on June 28 as it tracks the metal’s price. While the trend remains bearish, palladium is bound to find a bottom sooner rather than later.  

Positive Fund Flows 

At $113.81 on June 30, PALL had $243.82 million in assets under management. The fund trades an average of 33,076 shares daily and has a 0.60% expense ratio. 

The etf.com Fund Flows tool shows that $28.85 million has flowed into PALL in 2023.  

Palladium is the least liquid precious metal on the CME’s COMEX and NYMEX exchanges. However, PALL is a liquid product that tracks the illiquid metal’s price performance. Low liquidity can lead to extreme price volatility, as we witnessed with the more than 64% drop.  

When palladium finds a bottom, the upside price action can be as volatile as the downside. I favor a scale-down buying approach to PALL as palladium prices search for a bottom as events in the world’s leading producing country support a higher price.  

Meanwhile, buying palladium at the current low price may be a contrarian approach, but remember, the cure for low prices in a commodity market is always the low price. Production tends to decline when prices fall and consumption increases, leading to a recovery.  

Moreover, Russia’s desperate need for cash could mean the secretive government has been selling reserves and depleting stockpiles. The country considers its commodity stocks a national security matter, making transparency a challenge. Addressing climate change and Russian turmoil are bullish for palladium prices.