When most people think about investing in precious metals, gold and silver come to mind. But palladium is rarer and more durable than gold, silver, or platinum, and it is quickly becoming a coveted asset in the precious metals market.
Palladium is a valuable metal with various industrial applications, such as jewelry, electronics, dentistry, and catalytic converters for vehicles. Its high demand, coupled with recent supply restrictions due to its limited availability, has made palladium stand out among other metals.
If you are interested in learning more about palladium and how to invest in this precious metal, read on. This article will explore what palladium is, how the metal is used in different industries, reasons to invest in palladium, and how you can invest in palladium.
What is palladium?
Palladium is a shiny silver-white metal that belongs to the platinum group of metals (PGM), which also includes platinum, rhodium, and ruthenium, among others. It was first discovered in the early 19th century by English chemist and physicist William Hyde Wollaston and was named after the asteroid Pallas, which in turn was named after the Greek goddess Athena (Pallas Athena).
As a metal, palladium is non-corrosive, hypoallergenic, and less likely to lose its luster over time than other metals. These characteristics make it popular in various industrial applications, such as electronics, dentistry, medicine, jewelry, and even groundwater treatment.
Where does palladium come from?
Most of the world's palladium supply comes from mines located in South Africa, Russia, the United States, and Canada. It is usually mined alongside other metals, such as platinum and nickel. In recent years, the world's two largest palladium-producing countries, South Africa and Russia, have experienced mining disruptions that have limited supply.
In South Africa, worker strikes and a lack of long-term investment in production facilities disrupted mining output, although this has largely returned to normal. Russia produces nearly half of the world's palladium supply, but its war against Ukraine has placed it on the receiving end of sanctions. In 2022, two Russian state-owned refineries were suspended from the good delivery lists of the London and Chicago stock exchanges.
What is palladium used for?
One of the most attractive features of palladium is its versatility, and the metal has important applications in a variety of industries. Here are some examples of how palladium is used in different applications:
1. Catalytic converters: Palladium's properties help speed up chemical reactions, and more than 70% of the world's supply of this metal is used to manufacture catalytic converters. These help convert harmful gases, such as carbon monoxide, hydrocarbons, and nitrogen oxides, into less harmful substances, such as carbon dioxide, nitrogen, and water vapor.
2. Electronics: Palladium has excellent conductivity and is resistant to corrosion, making it a useful metal in the electronics industry, where it is used to produce multilayer ceramic capacitors (MLCCs) and to coat electronic components and connectors.
3. Jewelry: Palladium is hypoallergenic, tarnish-resistant, and non-corrosive, making it ideal for jewelry. It is often mixed with yellow gold to form a metal that is more resistant than white gold.
4. Dentistry: Palladium's biocompatibility and durability make it useful in the dental industry, where it is used to create alloys for crowns, bridges, and other dental work.
5. Chemical industry: Palladium is used as a catalyst in various chemical reactions and is essential in the production of bulk chemicals, pharmaceuticals, and petrochemicals.
6. Carbon monoxide detectors: Palladium chloride catalyzes carbon monoxide gas into carbon dioxide, making it a useful metal for carbon monoxide detectors.
7. Fuel cells: Palladium is used in certain types of fuel cells, which convert the chemical energy of fuels into electricity through a chemical reaction.
8. Investment: Palladium is traded as a commodity and has attracted the interest of investors around the world due to its unique applications.
Things you should know about palladium:
Before you start investing in any precious metal, it is important to understand its background, history, past performance, and other characteristics. This can help inform your investment decision. Here are some things you should know about palladium before investing:
· Rarity: Palladium is 30 times rarer than gold and 15 times rarer than platinum. This rarity can affect its price in commodity markets.
· Production: In 2021 alone, more than 200 metric tons of palladium were mined. Most of it came from Russia (80 metric tons), followed by South Africa (74 metric tons) and Canada in third place (17 metric tons).
· Historical highs and lows: The price of palladium reached historic highs in February 2022, when it traded at over $2,981. Its lowest recorded price was in August 1977, at just $41.70.
· Properties: Palladium is more durable than gold and platinum. It is also very malleable and can be worked into thin sheets of one to two hundred and fifty thousandths of an inch. These sheets are generally used in solar energy or fuel cell applications.
Why invest in palladium?
So what makes palladium a good investment? There are several reasons why you should consider investing in palladium, including:
· Inflation hedge: Investing in precious metals, such as palladium, offers an excellent hedge against inflation. These physical assets tend to retain their value (and even increase it) during periods of inflation and currency devaluation, allowing investors to maintain purchasing power during periods of economic instability.
· Limited supply: Unlike paper money, which can be printed at will, palladium has a limited supply. In general, finite assets with high demand are expected to exhibit upward price trends. In addition, the main sources of palladium are Russia and South Africa. Any geopolitical or operational disruption in these regions will affect supply and likely drive prices higher.
· Portfolio diversification: Investing in palladium and other precious metals is an excellent way to diversify your portfolio and balance overall risk. Precious metals tend to move in the opposite direction to traditional markets. When assets such as stocks or bonds depreciate, precious metals increase in value and vice versa.
· Potential for large gains: The palladium market is highly volatile and offers opportunities for significant gains. While this may involve greater risk, price fluctuations can also offer greater rewards.
How to invest in palladium?
There are different ways to invest in palladium, each offering its own advantages and disadvantages depending on your priorities and investment strategy. Below, we look at three different ways to invest in palladium, including the pros and cons of each.
Palladium ETFs: Palladium exchange-traded funds (ETFs) are index funds that trade on exchanges like stocks. These funds may hold physical palladium or invest in futures contracts and other palladium-related assets. Buying shares in a palladium ETF allows you to gain exposure to palladium price movements without having to own the physical metal itself.
Here's how palladium ETFs work: when you buy shares in a palladium ETF, you are buying a portion of the fund's assets. These are typically backed by physical palladium stored in secure vaults or by financial instruments linked to palladium prices. The value of the ETF shares will fluctuate based on the price of palladium, and you can buy or sell shares on stock exchanges during trading hours, just as you would with stocks.
Advantages of investing in palladium ETFs:
· Liquidity: ETFs are highly liquid and can be traded on major stock exchanges, making it easy to buy and sell palladium shares.
· Convenience: ETFs are a convenient way to gain exposure to palladium without having to deal with the purchase, storage, or insurance of the physical metal itself.
Disadvantages of investing in palladium ETFs:
· Management fees: ETFs typically charge management fees, which can reduce overall returns. If you plan to invest in palladium ETFs, be sure to check the fees beforehand.
· Tracking errors: There may be slight discrepancies between the ETF's performance and the actual price of palladium. While these may be marginal, they can add up over time.
· Market risk: Like all publicly traded securities, palladium ETFs are exposed to market risks, such as price volatility and potential liquidity issues during periods of market stress.
· Related reading: Everything you need to know about gold ETFs.
Palladium bullion:
Palladium bullion basically involves buying physical palladium in the form of palladium bars or coins. This allows you to directly own the metal, offering tangibility and security.
You can purchase palladium bars or coins from precious metal dealers or mints and store them at home, in a bank safe deposit box, or in a professional security vault. The value of your palladium bars or coins will be directly linked to the current spot price of palladium.
The advantages of investing in palladium bars include:
· Tangibility: Physical palladium is a tangible asset that you can own and store, offering a sense of security and ownership that does not exist with other forms of palladium investment.
· No counterparty risk: By owning the physical metal, there is no counterparty risk. This means you do not need to rely on a financial institution or third party to fulfill their promises.
· Intrinsic value: Like other precious metals, palladium has an intrinsic value that makes it a valuable asset to hold.
The disadvantages of investing in palladium bullion include:
· Storage considerations: Purchasing physical palladium involves additional considerations in terms of secure and possibly insured storage. This can add to the cost.
· Liquidity: While physical palladium is still highly liquid and can be easily bought and sold, it is not as liquid as ETFs or other investments that can be sold at the click of a button.
· Premiums: Purchasing physical palladium generally involves paying small premiums on top of the spot price, which can slightly reduce returns.
Shares in palladium mining companies:
Investing in shares of palladium mining companies involves buying shares of companies that are engaged in the exploration, extraction, or production of palladium. These are typically listed on major stock exchanges and offer indirect exposure to palladium prices through their commercial operations.
The performance of palladium mining company shares will depend on several factors, including the price of palladium, the company's production levels, and general market conditions. Since the profitability of these companies is often linked to the market value of palladium, mining shares can provide leveraged exposure to palladium prices.
The advantages of investing in palladium mining stocks include:
· Leverage: Mining stocks can offer leveraged exposure to palladium prices, potentially offering higher returns.
· Dividends: Some mining stocks pay dividends, which can provide additional income stream in addition to capital appreciation.
The disadvantages of investing in palladium mining stocks include:
· Operational risks: Mining companies are exposed to various operational risks that can affect their performance, such as regulatory changes, environmental issues, or labor disputes.
· Volatility: Palladium mining stocks can be more volatile than the actual price of the metal, adding risk to your investment.
· Company risks: When you invest in shares of palladium mining companies, you are exposed to additional company risks, such as management decisions or production costs.
What affects the price of palladium?
The price of palladium is affected by various factors. Knowing what affects the price of palladium can help you better understand its price fluctuations and spot opportunities to buy or sell your holdings.
1. Supply and demand: Like other commodities, palladium prices are influenced by the laws of supply and demand. High demand and low supply drive prices up, and the opposite is true.
2. US dollar: A weaker US dollar tends to increase palladium prices, and vice versa.
3. Automotive industry: Because most of the world's palladium is used in the automotive industry, its price is largely dependent on the success of that industry. When the automotive industry is thriving, demand for palladium is higher and so are prices.
4. Recycling and substitution: Some palladium products, such as catalytic converters, can be manufactured from recycled materials. A healthy recycling market indicates an increase in the supply of palladium, which can reduce prices.
Start investing in palladium!
Palladium is a rare, durable, and versatile metal with important uses in various industries. Growing investor interest, coupled with supply constraints, make palladium a rising star in the world of precious metals investing. If you're ready to begin your palladium investment journey, you're in the right place.
By StoneX Bullion