Today, we consider a stellar performer.
In a market in which precious metals have patently not shone over the past few years, this one has positively glistened.
In 2016, it rose some 45%. In 2017, it was up 60%. In 2018, it was up 15%.
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I'm talking about palladium.
The rise and rise of palladium
Palladium is a little known silvery-white metal categorised as a platinum group metal (PGM).
Its predominant use is in catalytic converters for cars. Catalytic converters account for around 80% of annual demand (excluding investment). The rest comes from electronics (it is used in ceramic capacitors in phones and laptops); jewellery (mostly as an alloy in white gold); in dentistry; and in the chemical industry (as a catalyst to separate hydrogen).
Annual demand is about seven million ounces. To put that number in perspective, annual silver demand is about one billion ounces, and annual copper demand is 24 million tonnes (there are over 35,000 ounces in a tonne).
It's a niche metal, in other words.
Russia is the world's largest producer, with just over 40% of annual global supply. Together with South Africa (just under 40%) they produce about 80% of global supply. I think it is fair to describe this concentration of production as "potentially problematic".
China is the world's largest consumer, requiring two million ounces in its vehicle industry alone, followed by Europe.
Palladium is traditionally seen as a cheaper alternative to platinum, though the evidence of the past few years is that this view is baloney. Platinum currently sits at around $850/oz, while palladium is almost 65% higher at $1,400.
The reason for this is perfectly simple. It goes all the way back to the Volkswagen diesel scandal of 2015 when it emerged that Volkswagen, and probably many more carmakers besides, had been understating the pollution emissions of their diesel engines. "Dieselgate" led to a sea change in attitude towards diesel, especially in Europe.
People no longer want diesel cars. Governments don't want diesel engines and so will tax them. Legislation has changed. Now the demand is for cleaner electric, petrol and hybrid alternatives.
Diesel vehicles' catalytic converters rely more heavily on platinum, and their sales have collapsed. Sales of petrol-fuelled cars have increased and the new emissions regulations have led carmakers to use more palladium.
Palladium, in other words, has been a regulation play. Will public opinion towards diesel change? Will regulation change? At the moment, it looks unlikely, but who knows what further scandals lurk under the surface.
Is it time to short palladium and go long platinum?
Most metals, be they precious or base, tend to trade together. If copper is in a bull market, for example, gold usually is as well. But palladium has always been its own animal. Between 1997 and 2001, for example, the palladium price went up nearly ten-fold (from $117 to $1,090/oz). The likes of gold and copper declined over the same period to 20-year lows.
When gold and copper had their day in the sun in the 2000s, palladium rallied too, but not by as much, and the highs were nothing like those seen at the turn of the century.
Here we see a very long-term chart of the palladium price going all the way back to the 1970s. Nick Laird, the chartist, has also plotted a green confidence band around the price 95% of the time palladium stays within that band. Just twice, around 1980 and then again around 2000/2001, has it gone above.
Maybe there is a 20-year cycle in palladium, and it's heading to a similar extremity around the 2020 mark. If so, you heard it here first.
For now, the price is extended. That happens in bull markets (and we will come to the current correction in a moment). But on the basis of a long-term historical comparable, there is still some room for further upside.
I sat on a panel at the UK Investor Show at the weekend discussing metals and mining, and I put it to the panel that the current trade should be long platinum and short palladium. My reason for that thinking was this: the ratio between platinum and palladium.
On a relative basis, platinum has never been this cheap, not even in 2001 at the peak of the last palladium mania. It is 60% of the palladium price. That is extraordinary. Not even a decade ago, it was 5.5 times the palladium price.
Andrew Monk, CEO of VSA Capital, who was sitting beside me, said, quite definitely: "yes, but not yet. Give it another year or 18 months."
I think he is probably right. We may well go back to platinum being two or three times the palladium price the historical average. With palladium at its current price of around $1,400, that would imply a platinum price above $3,000, some four times higher than it is today.
But for now the regulatory and legislative winds are blowing in the face of platinum. We need a major shift in attitude. Some new use needs to be found for platinum or some new tech needs to be proven ensuring cleaner diesel.
Or, for some reason, supply needs to dry up altogether. Given the current state of South African mining, the latter is the most likely, I'd say. For now, if anything, the supply deficit is more in favour of palladium than platinum.
Last week palladium began a fairly sharp sell-off, correcting from $1,600 to $1,350 in just a dew days, before rallying slightly to its current price of $1,400. That may be the start of something bigger or it may just be one of those corrections you get in bull markets.
I'm tempted to go short with a stop just above the old highs, but for now I'm staying my hand.
I notice, by the way, that investors in exchange-traded funds liquidated over half a million ounces of palladium in 2018. That was the fourth consecutive year of net redemptions. That is not something you would expect to see at or near market highs. You would expect to see investor buying.The contrarian trade is currently to be long.
It all makes me think Monk may be right. It's coming but we are not there yet.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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