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Learn To Trade Palladium: What You Need To Know

PalladiumBelieve it or not, but platinum and palladium are the most widely used of the six platinum metal groups by consumers and manufacturers in today’s economy.  Many short-term investors, speculators, and institutional day traders do not take it upon themselves to thoroughly understand where the actual industrial and consumer use of platinum and palladium takes its place in our societies around the globe, as these well-known precious metals groups are especially valued in the manufacturing world for their catalytic functions, their conductivity, and their resistance to corrosion.  Palladium is essential in key manufacturing processes in the automobile, chemical petroleum refining, pharmaceutical, and electronics industry.

Many of the comments about platinum also apply to palladium.  However, palladium does not have as high a profile as gold or platinum, and palladium prices are considerably lower than gold or platinum, which may give it a competitive advantage in some cases.  Palladium is not just a fancy precious metal, valued at retail value to its counterparts such as Gold or Silver, a quarter of all goods manufactured today either contain PGMs or have a significant part in their manufacturing process played by PGMs.  Palladium is also used in electronics, dentistry, medicine, hydrogen purification, chemical applications and groundwater treatment.  Palladium plays a key role in the technology used for fuel cells, which combine hydrogen and oxygen to produce electricity, heat and water because of its useful conductivity properties.

Palladium is mined with platinum and resembles it in many respects, but there are some important differences between the two metals.  Palladium is also produced as a byproduct of nickel mining.  Russia supplies about 65% of the world’s production, South Africa produces most of the rest, with North America providing about 8%.  Annual palladium production runs approximately 8 million ounces.

Regarding palladium markets pricing fundamentals in the form of bullion bars or rounds, Johnson Matthey a specialty chemical company, offered this assessment back in 2004:

“For palladium, however, it was (and is) harder [than platinum] to make a bullish case for investment based on the metal’s fundamentals.  The market has been in a position of oversupply since 2001.  Supply will continue to grow strongly from the expansion of pgm mining in South Africa and from increased recycling of autocatalysts and electronic waste.  Even with the most optimistic projections for autocatalyst, electronic and dental demand, the palladium market appears set to remain in substantial surplus.  Nevertheless, as the price of platinum climbed in 2003, fund managers increasingly inferred that the differential between it and the price of palladium would become unsustainably large.  With the risk of a downward correction in the platinum price considered small, due to the metal’s strong fundamentals, the conclusion was that the price of palladium would almost certainly have to rise.

In addition, the platinum and palladium markets are very small compared with other commodities, and are minute compared with equity, fixed income or foreign exchange markets.  Consequently, significant activity by hedge funds can move the price in either direction regardless of the fundamentals.  Furthermore, price trends can rapidly become self-sustaining as funds that trade on momentum or technical indicators are drawn into the market.”

According to Trader-Tech.com, “Automotive catalytic converters are the largest palladium consuming sector, accounting for nearly two-thirds of palladium consumption.  Electronic equipment accounts for about 20% of usage; dental alloys, 12%; and jewelry, 4%.  In addition to supply uncertainties, another fundamental issue that could support higher palladium prices is the runup to record high prices for platinum and gold.  The record platinum prices make palladium an attractive option for the auto catalyst market and even the jewelry market. With more cars being produced in emerging markets such as China and India, demand for palladium in catalytic converters is likely to increase.  With palladium priced at about a third the price of platinum, it is not hard to figure out which metal auto manufacturers would prefer to use if they have a choice.”

Sources:

1)    TraderTech (20, June 2011).  Palladium Trading.  TraderTech.com.  Retrieved from http://www.tradertech.com.

2)    Wikipedia (21, June 2011).  Palladium.  Wikipedia.  Retrieved from: http://en.wikipedia.org.

3)    Stillwater Mining Company (21, June 2011).  Investing in Physical Palladium.  Stillwater Palladium.  Retrieved from http://www.stillwaterpalladium.com.

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