This precious metal is rapidly losing status – which is a good time to buy

An electric car charging © Getty images
Will electric cars affect demand for palladium?

Got any platinum jewellery? You might need to trade up to something fancier.

Gold has been more valuable than platinum for a while now.

But now it’s not just gold. It’s a somewhat more obscure metal, and almost certainly not one you’ve ever considered wearing on your finger, in your ear, or around your neck.

It’s palladium.

Platinum’s demotion is all about the diesel emissions scandal

The gold price is currently sitting at around $1,295 an ounce. Platinum – which historically tends to be more expensive than gold (though not always) – is currently trading at just $930 an ounce.

But palladium – another platinum group metal – has now overtaken its better-known big brother to trade at $960-odds per ounce. And in fact, yesterday it managed to punch above the $1,000 mark for the first time since 2001.

This time last year, palladium was sitting at just $650 (platinum was at around $930). And even a few months ago it was barely above $800.  

So what’s going on?

It’s primarily about the diesel scandal, and the key uses for both platinum and palladium.

Platinum is used mainly in catalytic converters for diesel engines. Palladium, on the other hand, is used in catalytic converters for ordinary petrol cars (and as a result, it’ll also be used in hybrids, which have petrol cars backing up or backed up by batteries).

That’s bad news for platinum. The diesel emissions scandal means that sales of these cars have gone through the floor and they’re pretty much yesterday’s news (they were only ever big in terms of sales in Europe in any case). That means lower demand for platinum in manufacturing.

On the other hand, it’s boom time for palladium, amid the move to switch from diesel to petrol cars across Europe. Meanwhile, rising car sales in China have been good news for the metal – car sales hit their highest level this year last month.

Using prices to spot opportunities

It’s always interesting when prices do things that they don’t normally do. This is one reason that I’ve brought this move up today. It usually speaks to something changing, and that can spell opportunity.

I’ll warn you in advance though – I have mixed feelings about this one. It’s not a high conviction opportunity. But I’ll give you my views and you can see what you think.  

There are a couple of points to be aware of. Firstly, electric cars don’t need catalysts. So if you think adoption of electric cars will move more quickly than the market expects, then palladium is a short.

Secondly, there’s the substitution effect. Manufacturers could use platinum for catalysts instead. The reason they use palladium in the first place is because it’s cheaper. If that’s no longer the case, they could switch.

As Henny Sender reports in the FT, “it could take at least 18 months for carmakers to make the switch”, but it’s the sort of possibility that could prevent palladium from rising too far above the platinum price.

What’s the opportunity here? I’m not convinced that the electric car uptake will be quite rapid enough to cause palladium a problem right now. “Leapfrogging”, whereby diesel owners just go straight to electric, rather than hybrid or petrol, is a possibility, and If I owned a diesel car and I was looking to trade it in, I might take a look at an electric car.

But I suspect that in terms of cost-competitiveness and range anxiety, it wouldn’t quite be there for me yet. (Admittedly I have barely any interest in cars though, so don’t take me as a representative example of the population of car owners.)

The second point looks more of an issue to me. Palladium can only rise in value so far compared to platinum, before switching becomes a big temptation.

And there’s another issue. Only about 40% of platinum is used in catalytic converters. For palladium, the figure is 70%. So there are plenty of other sources of platinum demand, and that demand will likely pick up if the price falls. For palladium, that’s not the case.

So if I’m honest, the trade I’d be most tempted by is a pairs trade: short palladium and long platinum. (In other words, you’re betting on the gap between the two closing in platinum’s favour.)

But having said that, I have no idea of when that turnaround might happen, and this is one of those short-term trades that would take a lot of energy to monitor and could end up being an expensive mistake. (If you do decide to look at it, it’s probably more sensible to use a long ETF (exchange-traded fund) and a short ETF, rather than opting for spread betting – the latter is easier to do, but also a much riskier way of executing an already-risky trade.)

An easier trade would simply be to go long platinum (again, you can use an ETF). The metal is not far off the lows seen in 2008 and 2015 (which was a shocker of a year for commodities). At that sort of level, it seems cheap, particularly given that the rest of the metals sector is in pretty good shape at the moment.

It’s one to keep an eye on. And in the meantime, if you want to read more about the electric vehicle revolution, check out our recent cover story on the topic.

  • Jonathan Tedd

    This comment I saw at Surplus Energy Economics

    “In addition to that problem we have the limits of lithium production. Presently at current production it would take 200years to produce the amount needed to transform our petroleum based transport to EV. Of course that is all dependent on diesel being available to continue mining lithium, which is kind of the problem in the first place. It would require a 1600% increase in production to come anywhere close to the predicted EV development. And that would become far too little considering that Lithium Batteries only have a 10 year life cycle. So the real production would have to increase by 3200-6400% to be meaningful. But frankly it’s impossible because of two limiting factors. One there isn’t enough know lithium resources to meet that demand ( not referring to reserves which are far less ). Secondly there isn’t enough primary energy to accomplish that level of mining. This is particularly true when we consider that lithium unlike oil is not a source of energy. So besides the production of lithium we need to find the energy to power the transportation system. It’s really just an act of desperation.”

    • Pattama Rangklang

      There are now 75 million tonnes of reserve, enough to make 10 billion cars, but there is also an estimated 400 trillion tonnes of resource within the earths crust, it is a very common element, the resource becomes a reserve once the demand increases the price enough to make mining and production viable.