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Whenever an asset falls in value by 80%, it has to
be examined for its potential as a contrarian, value-oriented investment. Such
is the case with Palladium. In a commodity bull market, where substantial
run- ups have occurred in oil, copper, precious metals, and other raw
materials, palladium has escaped the notice of most investors. Even more
interesting, is that the price of palladium has declined in the midst of
rising demand. I believe that this trend is about to reverse, as the
manufacturing community is taking notice of the substantial spread between
the two metals that are similar in their industrial use.
My Mechanic Knows Best!
This past weekend, my wife and I took our car to the
local mechanic. We needed to replace our catalytic converter, and figured
that we would get a couple different quotes on how much it would cost us. Now,
I don't know too much about cars, but I figured that a catalytic converter
was a catalytic converter. Meaning, if a catalytic converter accomplished its
goal- which was aid in clean fuel emissions, than it was just as good as any
other catalytic converter. Consequently, I assumed that the prices of the
different converters would be relatively the same. I was shocked to find out
that Converter A was twice as much expensive as Converter B. Of course, this
all made sense when my mechanic mentioned that the difference between the
converters was the primary metal that was used. "Palladium," he
said, "is substantially cheaper than platinum!"
The Increase Demand for the Metal
Although palladium is used in a variety of
industries, from electrical components to surgical instruments, its greatest
demand is set to come from the automobile industry. The demand for palladium
from the automobile industry is based purely on cost. The spread between the
two metals is significant. If you look at the charts below, you can see that
Platinum is currently trading at over $900/ounce, while Palladium is just
under $200/ounce.
 
From a cost-effective point of view, palladium
catalytic converters are substantially cheaper. However, as the charts above
show, this has not always been the case. When palladium was at record highs,
the automobile industry switched to platinum based catalytic converters and
in the process, accumulated a substantial amount of reserves.. As the automobile industry starts to deplete its
platinum reserves, they will revert back to the cheaper palladium. In fact,
this has already started to happen. Industry reports show that demand for
platinum from the North American automobile industry declined by 10 % in
2004. Conversely, the demand for palladium increased by 20 % in 2004.
The demand for palladium has also increased in China.
With the fastest growing automobile market in the world, the Chinese are
scrambling to meet its fuel efficient standards for the 2008 Beijing
Olympics. Once again, this bodes well for palladium since it is a cheaper
substitute to platinum.
The Other Precious Metal
In addition, the longer a bull market in commodities
rolls along, the more palladium will likely come to be viewed as a precious,
rather than industrial, metal. Like, silver, which is often viewed as a
"poor man's gold", palladium may experience its biggest gains late
in a precious metals market.
Currently, palladium is trading just under
$200/ounce. Looking at the chart below, we can see that palladium has bounced
between the 180 and 205 levels. At this price, I would buy the metal in
increments. From a psychological perspective, investors are still uneasy
about an intermediate upward trend in the metal. I would expect continued resistance throughout its move.
Now, investors should beware: historically, Palladium has been a
volatile and speculative metal, with prices trading from over $1000 per ounce
(January 2001) to as lows as $150 in April 2003. I believe, however, that
because the potential gain for palladium could be substantial, it can be
looked at by many investors as an attractive speculative counterpart to gold
and silver, the holdings that should be treated like the cornerstones of a
precious metals portfolio.
If you are interested in learning more about the commodity bull
market, I urge to pre-order my forthcoming book, "Commodities for Every
Portfolio: How To Profit from the Long-Term Commodity Boom".
Emanuel Balarie
Senior Market Strategist
Wisdom Financial, Inc.
Direct toll free: 866-465-0017
International: 949-548-2021
Emanuel Balarie is the Senior Market Strategist at Wisdom Financial.
As an expert on foreign markets, foreign currencies, and the precious metals
industry, Mr. Balarie often speaks at public
engagements and his research is regularly published in investment
newsletters. You can find out more about Mr. Balarie
and his services at www.wisdomfinancilinc.com
The risk
of loss in trading commodity futures contracts can be substantial. You should
therefore carefully consider whether such trading is suitable for you in light
of your financial condition.
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