By John McDonald
When you think of precious metals, the yellow metal (gold), probably springs to mind. After all, from King Midas to present day, gold has represented a strong and precious investment across cultures.
This week, however, palladium surpassed not just gold, but also silver and platinum, to become the most valuable of the four “major” precious metals in today’s market.
While gold has hovered around the $1,500 mark for months with analysts predicting an extended bull market on the metal but not a sudden rise, a combination of tight supply and hedge fund speculation has driven palladium prices skyward.
At present, palladium is valued at more than $1,800 per ounce compared to about $633 in November 2016.
If you’re wondering what palladium is, you’re not alone. Many investors have only recently started paying attention to this lustrous white metal, which is one of six “platinum-group metals.”
These metals include ruthenium, rhodium, osmium, iridium, and platinum. Platinum-group metals are largely known for their use in jewelry-making, but they are also used in many electronic and medical devices.
Palladium, in particular, plays a key role in the exhaust systems of cars. It is part of the system that converts toxic pollutants into carbon dioxide and water vapor and has historically been produced as a byproduct of platinum and nickel mining.
So why is a mining byproduct suddenly the most valuable precious metal on the market?
A lot of palladium’s growing value has to do with many nation’s relatively recent crackdown on pollution from vehicles, which has forced automakers to use more palladium and include more modern exhaust systems in every new car.
Although the demand for palladium has been trending for years now, the market lags because mining operations for the metal are based entirely on producing it as a secondary product. 2019 is actually the eighth straight year that the amount of palladium produced on the global market will fall short of demand.
Not surprisingly, this extended scarcity has resulted in rising prices.
Palladium is now selling at nearly triple its price just three years ago. A great deal of speculative investing on the part of hedge funds also is contributing to this trend. In fact, many major hedge funds have been betting palladium prices will rise since August 2018.
Adding additional fuel to the rally, many experts in the market believe China is stockpiling the metal although these rumors cannot be confirmed. Stockpiling would be a practical move for the country, however, because China buys more automotive-quality palladium than any other nation.
Many investors believe the window on the palladium bull run could be closing in the next few years as automakers explore alternative exhaust systems that use platinum instead of palladium.
The automotive industry is known for sparking soaring prices in its precious metals that last until carmakers develop methods for using less of the metal.
In 1996, palladium investors enjoyed a five-year bull run for a similar reason, and between 2002 and 2012, rhodium enjoyed a 4,000% rally for the same reason.
However, both rallies eventually leveled out as technology eventually enabled the automotive industry to adjust practices to reduce use of the metals. At present, palladium is still going strong, but investors interested in enjoying this appreciation should not hesitate too long.