Is Rhodium on the Road to Recovery?

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The rise and fall of empires have nothing on the precious metal rhodium, which represents such a dazzling story of gain and collapse that you'd think it to be capable of taking down the entire global economy.  No metal in history has ever peaked as sharply or as steeply as rhodium, which rose to more than $10,000 per ounce (nearly ten times the equivalent value of gold) in 2008, a figure that has since declined by 90% to its current value of $1135 per ounce.  Rhodium has faced nearly a straight decade of a bear market, dwindling down without much hope of coming up.  Yet by looking deeper at the rhodium picture, and specifically by comparing its performance to other precious metals, it's not a stretch to suggest that rhodium is on the path to recovery.

What's In A Name

A metal distinctly less sexy than gold or silver, rhodium is both particularly rare and particularly valuable.  Since rhodium has the atomic structure needed to bond together all its protons and electrons rather than bond them with outside elements, it does not easily corrode thanks to this tight formation.  That makes it a godsend to machine producers who need to break down chemicals without having any chemical bond together with the holding apparatus.  The overwhelming majority of rhodium mined around the face of the Earth ends up in an engine's catalytic converter since the metal resists bonding together with hydrocarbons produced by burning oil, a resistance that steel and aluminum cannot duplicate.  As rhodium belongs to the platinum family of metals, it can be used in an alloy of platinum and palladium in order to produce corrosion-resistant metal when either cousin metal needs to be able to endure the elements. 

Digging Deeper

Part of rhodium's value, and its astronomical growth up until 2008, comes from its rarity.  There are only ten rhodium mines in the entire world, compared with two dozen major gold mines in the United States alone.  Only a select few parts of the Earth are blessed with abundant rhodium due to the heavy metal often sinking through lighter carbon soil.  Eight of the ten rhodium mines in the world lie in South Africa, a nation where mining has historically been the richest in the world but today represents something akin to a sinking ship.  The South African instability represents the first basis for growth in the rhodium market, as the amount of rhodium and platinum exported by the nation accounts for 8% of the total gross and thus are particularly strong contingents of the current South African trading deficit, which fell by nearly a quarter in 2014.  Only about 25 tons of rhodium are mined each year, just 1% of the production of gold.  As such, even minor concerns make for big ripples.  As the South African economy worsens -- the rand came within an inch of double-digit losses last year -- rhodium will grow steadily thanks to diminished supply hedged against no foreseeable drop in decline. 

Against the Field

While the mining complications represent one of the big incentives for investing in rhodium, a more careful analysis of the metal's performance compared to its peers provides more evidence for the case.  Rhodium gained big against other precious metal commodities in 2014: unlike gold, it's performing about $50 better today than it was at this same time last year.  More importantly, rhodium gained against platinum in a big fashion.  In August of 2014, rhodium outperformed platinum for the first time in no less than 31 months.  Both metals have risen and fallen since then, but rhodium has largely stayed positive while platinum continues to drop.  While platinum has largely followed the movement of gold prices, rhodium has taken its own path.  The rare metal has regained 50% of its value since its market bottomed out, making it one of the better performers of the past five years.  While there's no question that rhodium will probably never shoot back up to ten thousand dollars per ounce (or at least not without massive devaluation of the dollar), it's also clear that rhodium is in the best bull market it has experienced since its dizzying, drunken heights of 2008.

Into The Black

How can someone profit from the resurgence of rhodium?  Investing directly in the metal represents the easiest, and likely most profitable, mechanism.  While rhodium's performance over the past 12 months is strong, the last 6 months have seen fairly consistent drops.  That's good news for investors who want to buy low, as rhodium has never lost value for six straight months since 2012.  It's a great time to get in on rhodium when it will likely not be significantly cheaper for the future with the very good potential to hit highs of $2000 per ounce by the end of the year, when South Africa enters the dry season and the scaling costs of water make mining difficult.  The companies that profit from rhodium price scaling also represent opportunities for investors to double down on the rhodium rise.  Stillwater Mining Co (SWC on the New York Stock Exchange, trading at $14.49 per share) has enjoyed consistent gains in the past six months, ever since the bottoming out of the precious metals market.  They represent the biggest American interest in rhodium (as well as platinum and palladium), meaning that they reap the benefit of a stronger metals performance.  The month of May has been particularly kind to this specific stock, rising by ten percent in the first week alone.  Other appealing candidates include the Canadian Eastern Platinum (TSX on the Toronto Stock Exchange, trading at $2.14 a share) who have watched their stock price double in the past six months after the hardest hit in the metals market.

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