Should you invest in platinum and palladium?

Almost every type of raw material, from agricultural commodities to obscure rare-earth metals, is soaring in price. In some cases there are solid fundamental reasons for this – bad weather and trade restrictions in the case of many ‘soft’ commodities.

In others, such as oil, the rise has more to do with the threat of quantitative easing than any genuine imbalance between supply and demand.

Some of the biggest excitement is happening in precious metals. There’s gold and silver of course, but platinum has had a decent run too. And the more obscure palladium has absolutely hammered all three – rising by around 60% since the start of the year. And many analysts think it could have a lot further to go.

So should you buy in?

What drives the prices of precious metals?

Gold, silver and the platinum group metals (which include palladium) all come under the broad category of ‘precious metals’. You can even buy exchange-traded funds (ETFs) that track a basket containing gold, silver, platinum and palladium.

So you might be tempted to think that they are all driven by similar factors. But that’s where you’d be wrong.

Certainly, the weak dollar and fears over more money printing by the Federal Reserve have helped boost all commodities. But platinum and palladium are also being helped – more than anything else – by the recovery in the car manufacturing industry. Both metals are used in catalytic converters for vehicles.

Palladium is mainly used in catalysts for petrol-powered cars. As petrol engines dominate the market in China, now the world’s biggest car market, palladium is seeing demand soar as a result. China saw sales of cars to dealerships rise by 19.3% year on year in September. And with yesterday’s strong manufacturing data from China, the US and India, palladium rose to a nine-year high of $655 a troy ounce.

There’s another story going around that backs up the bullish case for palladium. Dave Meger of Vision Financial Markets tells Kitco.com that there are rumours that Russia’s stockpiles of palladium are dwindling. In 2009, the country provided around 42% of global palladium production, so any disruption to this supply is significant.

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“There have been some assumptions that the Russian stocks are dwindling due to this significant increase in investor demand. A portion of those stocks are believed to have come to market,” says Meger. Tighter supply plus rising demand of course means higher prices.

Now I’ve heard this “Russian stockpiles” story in relation to several metals in bull markets in the past. I’d take it with a pinch of salt. Russia doesn’t make its stockpile figures public. So if I were they, I’d be more than happy to put about rumours that my stash was being depleted, if it pushed the price a bit higher. It’s no different to the Saudis talking up the ‘target price’ of oil whenever they get the chance.

But one new source of demand that you can’t dismiss is that from investors. A physical-backed palladium ETF launched in the States earlier this year. ETF holdings around the world have risen from just under 1.2m ounces to 1.88m this year alone. And as investors see prices rise ever higher, they tend to chase them up.

So should you buy in?

It depends on what you think is going to happen next. As I noted above, platinum and palladium aren’t driven by the same factors as gold and silver. Ultimately gold is money. That’s why people buy it. Its industrial uses are fairly irrelevant to demand for the metal.

Silver has a greater industrial demand component. That’s why it’s a lot more volatile than gold (which is volatile enough for most of us), as my colleague Dominic Frisby has observed. But it has a solid history of being used as coinage for centuries behind it.

This means that people buy gold and silver when they are worried about the state of the financial system. Things like money printing and fears over bank stability are good for these metals. So they can hold their value pretty well, even in the depths of a recession.

The trouble with platinum and palladium on the other hand, is that they are very much industrial metals. Sure, platinum makes for expensive jewellery. But it has no real monetary function, unlike gold and silver, which were used for centuries as coinage. What this all means is that economic growth has to be healthy or improving in at least part of the world to keep their prices rising.

You just need to look at what happened during the financial crisis of 2008 to see this in action. Both gold and platinum prices slid along with everything else. But the platinum price fell by 66% from its 2008 high while gold fell by just 29% before starting to rally. Indeed, for a brief period in 2008, an ounce of gold cost more than an ounce of platinum.

With gold now trading at record highs, platinum – which is still well off its record high of above $2,000 an ounce – may look like good value. But that all depends on whether the global recovery is sustainable.

I wouldn’t take any sort of speculative position ahead of the Federal Reserve’s money-printing revelation tomorrow in any case. But for my money, I’d still favour gold over the platinum group metals. The yellow metal should continue to benefit if the Fed decides to print more money. Yet it shouldn’t suffer as badly as the other precious metals if the Fed is unexpectedly stingy with its quantitative easing.

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