The mystery metal that could outshine platinum

If asked to think of a metal to invest in, few investors would consider palladium, a little known sister metal to platinum. But with prices reaching all time highs, we suggest the best ways to play palladium.

If someone asked you to think of a metal to invest in, you'd probably name gold first. Perhaps you'd also plump for silver or platinum. Few investors would even consider palladium, a little-known sister metal to platinum.

But palladium, like platinum, is around 15 times rarer than gold. And like platinum, it can be used in catalytic converters to reduce emissions from petrol engines. In fact, many analysts have been expecting car-makers to substitute palladium for platinum since 2002, when the price of platinum began to shoot higher. Yet the automobile industry chose not to substitute at a platinum/palladium price ratio of 2:1. They passed again when the ratio hit 3:1.

Why are they avoiding it? It's a case of once bitten, twice shy. Palladium is mostly a by-product of nickel mining. At present, Russia controls around 75% of the world's nickel supply (Russia has also held palladium stock off the market in an attempt to drive the price higher). As you can see from the graph above, palladium prices spiked above $1,075/oz in 2001, thanks to a squeeze created by Almazyuveliexport, the Russian state-controlled monopoly. Car-maker Ford was nearly bankrupted as a result of its commitment to using palladium in its catalytic converters.

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The Russian supply risk has not gone away. But developments elsewhere mean that buyers may soon be prepared to accept that risk and increase their palladium use. For starters, changes in the auto industry are favouring palladium. Many new car designs place the catalytic converters closer to the engine block and palladium has a higher melting point than platinum.

There is also the growing demand for new cars in China to consider. Last year alone, domestic car sales increased by 50%. That makes China's car market the fastest growing auto industry worldwide. By some estimates, China will produce 8 million automobiles by 2011, twice the current production. And China is not immune from stringent emissions standards especially if Beijing wishes to maintain the standards required to host the 2008 Olympic Games. In other words, more automobiles will mean more catalytic converters.

China also loves palladium for its beauty. When 2005 statistics are released next month, most experts anticipate we will see a 70% increase in Chinese consumption of palladium for jewellery. The reason for this considerable increase is the high platinum price. In the past, palladium had been primarily used with gold to create white gold. Now consumers are looking to purchase necklaces and rings of pure palladium instead of pure platinum. Both are white metals with similar properties, but the palladium price tag is a lot lower.

Over the past four years, palladium has traded in a range from about $180/oz to about $420/oz. Platinum, meanwhile, has been steadily rising. Earlier this year, it set new all-time highs around $1,350/oz, surpassing its 1980 high. With platinum prices at four times that of palladium, the cheaper sister is looking more and more attractive.

Three ways to play palladium

How can you play the rising price of palladium? If you want a direct investment in the metal, owning palladium bullion bars or coins may be the best way. Investor-grade palladium bars are produced by some major refineries, while Australia and Canada have produced palladium Emu and Maple Leaf coins, respectively. Bars and coins are available from, usually at about a 10% premium to the spot metal price.

Palladium can be traded in the futures and options markets, although this carries real risk of major losses potentially unlimited on some types of trades. Investors interested in moving into this area may initially want to look at covered warrants from firms such as ABN Amro and Dresdner Bank.

Otherwise, investors can buy shares in palladium mining companies. This is not a direct investment in the metal and a rise in the palladium price doesn't necessarily mean an equal rise in the value of the company. In addition, most palladium is produced as a by-product of nickel or platinum mining. The few firms focused mostly on palladium include Stillwater (NYSE:SWC, $12.26), the largest primary producer of platinum group metals outside of South Africa, and North American Palladium (AMEX:PAL $8,18, TSX:PDL, C$9.10).

Michael Checkan is president of Asset Strategies International ( specialising in precious metals, foreign currencies and offshore wealth protection