3 Ways to Play a Surge in Palladium Prices

by Susan J. Aluise | May 6, 2014 6:00 am

3 Ways to Play a Surge in Palladium Prices

For investors looking to gain exposure to precious metals and resurgent mining companies, all that glitters is not gold. In fact, demand growth combined with shrinking supplies and regional conflicts are making platinum and its sister metal palladium shine brighter.

2010 American Eagle Platinum Coin 150x150 3 Ways to Play a Surge in Palladium Prices[1]First a quick primer: platinum and palladium are “sister” elements in the platinum Group Metals (PGM) family. Platinum famously is an upgrade to gold in jewelry, while palladium is used as an alloy to make white gold. Both metals are essential in industrial manufacturing — particularly in the automotive industry. The market for palladium in China is particularly robust.

Strengthening industrial demand for the metals is combining with Russia’s Ukraine crisis and an ongoing miners’ strike in South Africa to create a perfect storm. Russia is the world’s largest producer of palladium and additional economic sanctions could impact exports. In South Africa, the world’s second-largest producer, miners have been on strike for 14 weeks and the action already has had an impact on supply.

In a report out this week, FastMarkets’ analysts revised estimates, forecasting platinum to trade from $1,350-$1,650 an ounce this year, up from $1,280 to $1,650; palladium prices should move between $700 and $$900 an ounce, up from $660 to $862. The higher prices will be supported by growth in global vehicle sales and supply disruptions, the researchers said[2].

Given the importance of the two white metals to jewelry and industries like automotive, here are three ways to play the likely lower supply of — and higher demand for — platinum and palladium:

Impala Platinum Holdings (IMPUY)

Impala Platinum Holdings IMPUY 150x150 3 Ways to Play a Surge in Palladium Prices[3]As the world’s second largest platinum producer behind Anglo American Platinum, it goes without saying that Impala Platinum Holdings (IMPUY[4]) has faced headwinds with the South Africa mining strike so far this year. As a result, production of platinum group metals plummeted by more than a third in February. That said, eventually the strike that has idled 70,000 South African mine workers will end and IMPUY will get operations back on track.

With a market cap of $6.85 billion, IMPUY has a price to earnings growth (PEG) ratio of 1.5 and a forward P/E of about 14, suggesting the stock could be slightly overvalued. The stock is down about 5% year to date, but if the strike ends soon and production ramps up, investors could have some good news in the second half of the year.

ETFS Physical Palladium Shares (PALL)

ETFSecurities185 150x150 3 Ways to Play a Surge in Palladium Prices[5]If you’re bullish that the higher demand and geopolitical headwinds will drive palladium prices higher, the most direct play is with an exchange traded fund (ETF) that holds the physical metal, rather than investing in stocks of mining or other precious metal producing companies. ETFs provide several key advantages: They permit diversification within a sector, tend to have low expenses, and they trade over an exchange like a stock, rather than at the end of the day like mutual funds.

ETFS Physical Palladium Shares (PALL[6]) invests in physical palladium bullion and tracks the metal’s price on the spot market; it was launched in January 2010. With about $500 million in assets, PALL is trading at $79 — and the fund has gained 11% so far this year. The expense ratio is 0.6.

Vanguard Precious Metals And Mining Fund Investor Shares (VGPMX)

Vanguard 150x150 3 Ways to Play a Surge in Palladium Prices[7]Vanguard Precious Metals And Mining Fund Investor Shares (VGPMX[8]) invests at least 80% of its assets in the stocks of foreign and U.S. precious metals mining, exploration, development, and distribution companies. Physical gold, silver or other precious metals holdings can comprise up to 20% of the fund’s holdings. The fund is managed by metals experts Jamie Horvat and Randeep Somel; top holdings include Johnson Matthey (JMAT[9]) and Umicore (UMICF[10]).

With $2.5 billion in assets, VGPMX is recovering from a tough 2013 which saw performance plummet more than 35% — the worst single-year drop since the supply glut in 2008. It should be noted that when a rebound in manufacturing devoured supplies in 2009, the fund gained a whopping 76% — similar supply-demand dynamics may be setting up here and if so, the fund could perform well in 2014. VGPMX has gained nearly 6% this year; it has a tiny expense ratio of only 0.26.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities. 

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2012/12/2010-American-Eagle-Platinum-Coin.jpg
  2. the researchers said: http://www.fastmarkets.com/thebulliondesk/pgms-analysis-forecast-report-q2-2014
  3. [Image]: http://investorplace.com/wp-content/uploads/2014/05/Impala-Platinum-Holdings-IMPUY.jpg
  4. IMPUY: http://studio-5.financialcontent.com/investplace/quote?Symbol=IMPUY
  5. [Image]: http://investorplace.com/wp-content/uploads/2012/12/ETFSecurities185.jpg
  6. PALL: http://studio-5.financialcontent.com/investplace/quote?Symbol=PALL
  7. [Image]: http://investorplace.com/wp-content/uploads/2011/12/Vanguard.jpg
  8. VGPMX: http://studio-5.financialcontent.com/investplace/quote?Symbol=VGPMX
  9. JMAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=JMAT
  10. UMICF: http://studio-5.financialcontent.com/investplace/quote?Symbol=UMICF

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