Is Palladium About To Overtake Gold?


Odds are good that just about anyone who knows anything about gold investments has heard the popular anecdotes of the price of gold over time, usually set up in a formula like "my uncle bought $100 of gold in the 1970s and it's worth $100,000 today". It's no different than owning stock in Google back in 2002: we all want to be ahead of the curve on the next great investment. As 2014 rolls over into 2015, it's hard to look at palladium without getting quite excited about its potential as an investment. Is palladium set to overtake gold as the great standard of financial value?

What's In A Name

If you've only just started getting into the precious metals investment world, you can be forgiven for not knowing exactly what palladium is. You might go your entire life without seeing it since, unlike gold and silver, it's not much of a popular metal for jewelry despite the beautiful luster and ethereal appearance. Palladium remains hugely valuable, currently selling for a little over $800 per ounce, but has always been prized for use in industrial applications and not decorative pieces. The spark plugs used to power up an aircraft engine battery (90 million watts strong) require palladium due to the ultra-conductivity it offers. The relative strength of palladium makes it highly prized for materials that need to withstand force under all circumstances, such as surgical instruments. With a decent list of applications, demand for the metal remains high -- so high, in fact, that palladium grew in value faster than any other precious metal during 2014, even as gold recovered from a disastrous 2013 year.

Where It's From

There's plenty of nations famous for gold and silver mines but only a few recognized for their palladium output. Russia produces half of the palladium used world-wide alone and, if this seems like a lot concentrated in one place, consider that there are only three functional palladium mines in the entire country. The Norilsk Nickel Mine is world-famous for its production of palladium in addition to, you guessed it, nickel. While cobalt and gold can be found in the Norilsk mines, they pale in comparison to the importance of palladium production that occurs annually at the northeastern-most corner of Russia.

Why It's Growing

Gold and silver mining requires relatively little equipment and know-how. So long as you have a filter allows you to separate dirt from gold and the power to run it, you just need to put shovel after shovel full of ore-intensive earth into the filter untill you walk away as a millionaire. When it comes to palladium mining (and, for that matter, platinum mining) the game grows more complex. Palladium almost never comes in pure form, instead showing up at the processing facility in a hodge-podge of copper and nickel, requiring different steps of crushing, milling, and finally concentrating in order to be successful. For a long time, the profit margin on palladium stayed too low to demand the financial principal to set up operations. That changed with a soft labor market in Russia combined with a growing demand for the metal in the 1990s, which has snowballed ever since. In 1999, an ounce of palladium cost just $350. Since then demand has risen and the price per ounce has tripled despite the fact that productivity isn't changing much on a year-to-year basis.

The Year Ahead

It would be one thing to invest in a commodity that's sure to have high demand (oil) or a commodity that's sure to rise in cost relative to the consumer (beef). Those are the slow and steady investments that grow your wealth but likely will not make you wealthy on their own. In 2015 palladium appears that it will hit that sweet spot of high demand in addition to high cost relative to the consumer, meaning that it's price is going to go up, and not by a small value. Existing mines in South Africa have reported issues getting enough electricity to power the huge crushing mills needed to get the metal out of the dirt; what South Africa loses in productivity, the metal gains in value. The same factor holds true for palladium produced in Russia. That's due to the life-support status of the Russian economy in 2015, which the International Monetary Fund reports will shrink by several percentage points, possibly as high as 5%. A tight Russian labor market minimizes output; minimized output maximizes price leaps. The Russian market shouldn't be underestimated by even the most skeptical investments: the peak prices of palladium occured in 2001 when the nation temporarily shut down their exports of precious metals. With a spike in prices to over one thousand dollars per ounce, it's believed that the auto industry alone lost two billion dollars from the surging cost of the mteal.

What Goes Up

The correlary to a history of high gains, of course, is the reality that no commodity can grow in value permanently. However, the last significant drop in the price of palladium occured when Russia flooded the market with the metal in February of 2011, losing about 20% of the commodity's value within just a week. That's nearly impossible to happen again within the immediate future, since no nation is sitting on stockpiles and no companies are surveying new palladium mines due to the rarity. Can we conclusively say that palladium prices will not drop in 2015? Of course not -- but we can conclusively say that there are no factors that restrict its demand today.

Get In The Game

On the first day of 2014, you could buy an ounce of palladium for $700. On the first day of 2015 it sells for over $800. How much profit comes from holdings of the precious metal on the first day of 2016? That depends wholeheartedly on how much you choose to put into your investment portfolio. As gold continues to plunge from its 2011 peak, furthermore, it's simply a matter of time before palladium becomes the standard for precious metals investing.

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