Quick: What’s the world’s most precious metal?
If you answered “gold,” you’re not far off: gold is currently selling at “just” under $1,300 an ounce, more or less, depending on what day you’re in the market. Platinum, which might have been your next guess, is selling at a decades low, now priced at $880 an ounce. You can buy an ounce of silver for just sixteen bucks.
But, if you chose or guessed palladium, you’re right on the money. Palladium’s spot price recently passed gold. It now sells at more than $1,500 an ounce.
Palladium is a lustrous white material that is mined as a byproduct in platinum and nickel mines. It’s in the chemical family with ruthenium, rhodium, osmium, iridium and platinum. In industry, palladium is primarily used in the exhaust systems of gasoline-powered cars, part of the process that turns toxic pollutants into carbon dioxide and water vapor. But there are also uses in electronics, dentistry and jewelry.
Palladium is benefitting from the confluence of regulatory actions and pure economics (supply and demand). It was not always this expensive. The metal’s price has risen dramatically since last August, largely as a result of weaker demand for automobiles in Chinese and European markets, which has declined in 2018 and 2019. That, and other slowdowns in global economics, have reduced steel production. Thus, the need for mining nickel was reduced. Click here for illustration of gold vs. palladium prices over past six months.
Output of palladium from mines in Russia and South Africa has not kept up with demand, because the primary metals that are mined, for which palladium is a byproduct, lack demand. Palladium, even at these prices, don’t justify mining when the demand for nickel and platinum is low, while tighter emissions restrictions in the auto industry has created surging demand for palladium, used in catalytic converters. So, for the moment, the lack of supply compared to current demand is driving up prices, and some hedge funds are betting that prices will rise still further.
This makes for an interesting investing story, because based on these facts, you might be tempted to join the hedge funds and bet the farm on further increases. But there are cautionary tales in past metallic price movements. In the decade following 1998, platinum’s price soared more than 500 percent on widespread shortages, before the auto industry found palladium as a substitute. Rhodium’s price went up more than 4,000 percent over a similar period before car makers found ways to use less of it. Today, as costs rise, there is talk of finding alternatives to palladium-based catalytic converters. Should a sudden spike in demand for nickel occur due to direct need of the metal or for use in steel, then the supply of palladium could rise quickly. Demand would not change at all, which could cause the price to drop. And, of course, if electric cars take over the market—and flood the roads with autos that don’t have an exhaust pipe—then palladium might someday be as cheap as silver.