I’m a big fan of owning precious metals for the long haul. In fact, I think every investor should have an allocation to physical gold and silver in his/her portfolio — both as a hedge against a potential equity plunge, and as a way to combat what I suspect will be an inflationary spike brought on by currency-debasing policies of central banks around the globe.
But while gold and silver are the most common precious metals to hedge your holdings, they haven’t been very shiny in 2013 … especially when compared to fellow glitterati platinum and palladium.
Since the start of the year, platinum prices, as measured by the ETFS Physical Platinum Shares (BATS:PPLT), are up nearly 8%. Over the past six months, the price of the metal has spiked 21.5%. As for palladium, the price of this precious metal also is glowing. The ETFS Physical Palladium Shares (NYSE:PALL) has seen about an 8% rise in 2013, and shares are up about 32% during the past six months.
Meanwhile, the SPDR Gold Trust (NYSE:GLD) is down 2% year to date, and up only 2.4% over the past half year. Silver also has been relatively dull, with a slight gain of 0.24% this year, and 11.4% over the past six months.
So … what’s with the spike in platinum and palladium?
Well, the short answer is basic economics — i.e., higher demand for these metals along with factors causing supply restrictions.
On the demand side, we’ve seen a global economy that’s beginning to regain its health after several years of anemic performance. Although U.S. GDP for the fourth quarter showed a decline of 0.1%, there have been encouraging signs of growth in U.S. service sectors and manufacturing. Globally, Europe is seeing more signs of stabilization, with so-called green shoots all around, including a reading on business optimism that’s at its highest level in eight months.
Then we have China’s recovery. The Asian giant has averted the dreaded “hard landing” that so many pundits were predicting, and by most measures, the Chinese economy is headed back in the right direction after several quarters of declines in the rate of growth.
The China factor is extremely important to platinum and palladium prices, as the metals are used in all kinds of manufacturing, including in the auto industry. On that front, China just recorded over 2 million vehicles sold in January, according to the China Association of Automobile Manufacturers. Chinese auto demand alone is estimated to account for about 13% of global palladium demand.
One commodities floor trader I recently spoke with told me that the so-called “whites” — as both platinum and palladium are referred to by the pros — are all about the global economy. If traders think the global economy is going to do well, then the price of the whites get bid higher.
As for the supply situation, we’ve seen several recent areas where the supply of platinum and palladium has been compromised. Disruptions to mining operations in South Africa have caused a lack of availability in both the whites. There’s also concern that stockpiles of the whites in Russia, a major mining center, are beginning to run low. Extracting more platinum and palladium could begin to cost more, especially if it’s increasing harder to find.
The bottom line in the space was expressed by Standard Bank’s Yuichi Ikemizu, who in a recent Reuters interview said, “It is quite clear that this year, the demand will (exceed) supply. I think we are seeing steady buying actually.”
The combination of higher demand due to a brighter global economy, as well as constricted supply, is a perfect recipe for more upside in both the whites as the year unfolds, and it is something investors need to take a serious look at.
Fortunately, gaining exposure to both metals is as easy as adding PPLT and PALL to your portfolio.
As of this writing, Jim Woods was long GLD.