Bound for Bullishness: Palladium Beating Analysts’ Expectations

As part of the London Bullion Market Association’s (LBMA) Forecast 2013, 20 analysts from top firms such as Societe Generale (EPA:GLE), Barclays Capital and Deutsche Bank (NYSE:DB) predicted what the palladium price will do this year. On average, the experts forecast that the metal will hit a high of $851 per ounce, a low of $607 and an average price of $744.  

However, as Bloomberg recently reported, palladium is faring quite a bit better than the analysts expected. The publication notes that the metal’s 2013 low of $646.95 per ounce is “still higher than 17 of 20 forecasts” made in the LBMA report. In fact, palladium rose to a nine-week high of $771.30 just last Monday.

The news is significant given that gold, silver and platinum, the other metals covered in the LBMA report, have “already fallen below every [survey] participant’s low estimate,” hampered by the recession in Europe and fear that the Federal Reserve will reduce its bond buying.

The reason, Rohit Savant, an analyst at New York’s CPM Group, told Bloomberg, is that palladium “just has stronger fundamentals than most of the other metals.”

What’s driving palladium?

Rick Rule, chairman of Sprott US Holdings, also recently made that case. Writing for Uncommon Wisdom, he noted that the fundamentals for palladium — as well as platinum — “are uniquely suited to the current investment environment,” laying out the main factors he sees as casting a bullish light on the metals.

For instance, South Africa, Zimbabwe and Russia produce 90 percent of the world’s palladium, according to Rule, but supply from all three is being hampered by a variety of issues, including:

• Production declines: relatively few palladium mines are profitable, and in recent years miners have been closing those that do not at least break even. That’s a problem because unlike gold and silver, which are mined, but can also be gleaned from above-ground sources like vaults, palladium supply is essentially entirely derived from mines.
• South African catch-22: South African mines are unprofitable because in order to keep employment levels up, the government will not allow modern machinery to replace workers. However, mining companies cannot afford to pay these workers adequately because their mines are not making money. They also have no money to develop new ore bodies.
• Resource nationalism: Rule notes that Robert Mugabe, president of Zimbabwe, plans to push for the nationalization of his country’s mining industry in the next election. The nation is rich in palladium, but if Mugabe is successful, it will become much less appealing to miners.
• Aging Russian mines: Though Russia is more politically stable than South Africa and Zimbabwe, its palladium mines are old and their ore grades are declining.

As supply dwindles, Rule believes that demand is set to grow, driven mainly by the following factors:

• China’s air quality: the Chinese government has suggested that as part of a five-year plan aimed at improving air quality in the nation, it will “order manufacturers to have five times more platinum and palladium loadings per vehicle than currently used,” a move that could substantially increase the country’s demand for both metals. 
• Continued demand from North America, others: though China is only just starting to take steps to decrease pollution from vehicles, North America, Western Europe and Japan already use a lot of palladium in the vehicles they produce and will continue to do so. ETF Daily News points to North America in particular as a driver of palladium demand.

With demand set to grow as supply declines, Rule believes that “[p]latinum and palladium are still undervalued relative to the benefits they provide, but they cannot remain this cheap much longer.” They are set to go “higher, perhaps much higher — potentially creating a lot of wealthy speculators along the way.”

How to invest

Investing in palladium companies is an option, but lately some investors have been taking another route.

In a report published last month, David Franklin of Sprott Asset Management recommended that investors interested in palladium take a position in the metal itself, pointing out that “holdings of all platinum ETFs have increased by 30% since the beginning of this year and palladium holdings have increased by 16%,” both of which are “healthy increases.”

Similarly, Rule recently used $280 million to buy equal amounts of platinum and palladium through the Sprott Physical Platinum and Palladium Trust (ARCA:SPPP).

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Related reading: 

Palladium Likely to Remain in Deficit Next Year, GFMS Says

David Franklin: Platinum Price Going Higher

Introduction to Palladium Investing