A miner takes a break while working 3,250 feet below the surface of Stillwater Mining Co.'s Stillwater Mine in Nye, Montana, U.S., on Tuesday, Aug. 12, 2008. Stillwater Mining Co. is the only U.S. producer of platinum and palladium. Photographer: Chip Chipman/Bloomberg NewsCHIP CHIPMAN/Bloomberg
With gold prices hitting record highs, palladium is becoming a cheaper alternative for investors who want exposure to precious metals without the high price tag.
Palladium prices have popped almost 10 per cent year to date after hitting a low of $395 (U.S.) and a high of $571.
Palladium is typically used in auto manufacturing and prices are dependent on car sales and an improving global economic recovery. The advent of the physically backed palladium exchange-traded fund, ETFS Physical Palladium Shares , however, has provided an easier way to invest and trade palladium.
Since its creation in early January, the ETF has amassed a total of 788,505 ounces of palladium. The more metal ETF Securities removes from circulation, the higher prices rise.
Shares have risen 3.2 per cent year to date and the ETF currently has $358 million assets under management. For investors looking for exposure to a riskier precious metal, many analysts recommend palladium.
Soma sekhar Chereddy, analyst at Karvy Global Services, dubs the metal his favorite for 2010.
What is your long-term and short-term price target for the metal?
Chereddy: In 2010, we think the metal will touch around $675. By the end of this year, we think prices will be between $650 and $675. And over the next five years, we expect palladium to touch $1,000 an ounce. It's basically dependent on the long-term supply and demand situation. We think prices are going to double in the next five years.
What are some of the risks? What if China's growth slows resulting in deceasing auto demand, how do you hedge against those risks?
Chereddy: So 50 per cent of demand comes from auto demand ... China just accounts for 13 per cent for the auto production in the world. So ... we expect a possible slowdown in China not too dent prices so much ... Other metals, such as nickel, copper, are mainly dependent on China, but palladium is a different case, palladium is not dependent on China.
Has palladium run too much? Is it set for another cool-down before it gears up for another run?
Chereddy: We don't expect that to happen mainly as we were saying, because of automobile demand. In the first four months... U.S. accounted for 40 per cent of automobile production. It increased by 17 per cent ... So based on the factors so far, we don't see the automobile production slowing down any time soon.
What if the auto industry rotates out of gas cars into say battery-operated cars. Will this affect palladium demand at all?
Chereddy: Because of the replacement of the battery, there is going to be a risk for palladium. If it has to be replaced, then the demand from the auto sector is going to decrease but it can be covered with the investments. Right now, ETFs are the huge thing for palladium, so we expect some of that decreased demand to be covered by the investments.
There are some risks in mining in South Africa. What happens if mining there becomes easier? Won't that increase the supply in the market and hurt your supply and demand thesis?
Chereddy: Right now, the problem is there are some reserves in South Africa but almost all of them are not extractible, so they need new technology to extract to reach some of the supply they have. We don't see that happening right now.
Do you have a time frame for that supply kicking in ?
Chereddy: If palladium prices are more than $1,000 an ounce, then it might be feasible for palladium companies to use this new expensive technology and break even ... We expect palladium prices to reach $1,000 in five years and we see supply increasing a lot in the next five to 10 years. When there is supply and demand equality ... we see prices stabilizing at that point in time.
So palladium will double in the next five years, but it's going to stabilize at around $1,000 ?
Chereddy: Exactly. That's what we expect.
So let's talk about ETFs. How should an investor buy and invest in palladium?
Chereddy: Palladium ETFs are one option. There are also palladium coins and mining stocks. There is Stillwater Mining , which is a U.S.-based producer, and it has been doing very well. So far this year, it gained 55%. And there is a Canadian-based mining company, which is also listed in the U.S., which is North American Palladium . These are the two mining stocks you can invest in.
Tell me what the Greece euro crisis is going to do to palladium prices?
Chereddy: It's very difficult to price in that risk because ... it is not known exactly what it's going to impact. But since 20 per cent of the automotive production is based in Europe, and 50 per cent of the production is related to palladium demand, we think that the crisis will impact the prices between 3 per cent to 5 per cent overall.
To the downside?
Chereddy: To the downside, exactly.
Do you expect investment demand to rotate out of palladium and into gold because of this European crisis?
Chereddy: Investors are also trying to diversify their portfolio from gold. So these kind of investors, we think, will drive the demand for palladium. Right now, the palladium ETF is really performing well and we expect it to continue until the end of 2010. And we see, at the end of 2010, probably gold and palladium ETFs performing well in a similar way. The basic thing is that palladium is more volatile than gold. In the last couple of days, investors have seen the downside and, at the same time, they can see the upside as well for palladium.
Do you have a percentage of how much demand you think will come from industries vs. investments going forward?
Chereddy: For the whole year, we expect investor demand to account between 20 per cent to 25 per cent of palladium demand.