The rally in precious metals is gathering momentum.
First, gold – a mainly monetary metal – led the charge. Then, silver – both a monetary and industrial metal – followed suit.
And now, two mainly industrial metals – platinum and palladium – are on fire. In July, platinum saw its best monthly percentage rise since January 2012 and palladium’s rise was the best since February 2008.
Both have continued to surge in August to 14-month highs. Platinum is currently trading at $1186 per ounce while palladium is at $731 per ounce.
Is this price movement just due to speculation? Or are there fundamental reasons behind the move?
Auto Sales and China
At first glance, one would think it’s speculation. After all, a major use for both metals is in catalytic converters (platinum for diesel cars and palladium for gasoline cars) for automobiles.
And we all know U.S. auto stocks have no traction thanks to the perception we are at “peak” autos. Vehicles sales in the U.S. are expected to be on a downward slope going forward.
It is a different story, though, in the world’s largest auto market: China.
Total vehicle sales in China gained the most in 17 months in July. That follows June where sales rose by 15% from a year earlier. Overall sales for 2016 are expected to show a volume gain of 6.7%.
This is clearly supportive for palladium.
Supply Deficit for Two Precious Metals
However, the real story for platinum and palladium is on the other side of the equation – supply.
Both precious metals have been in a supply deficit for a number of years and finally the market seems to be noticing.
The forecast is for a supply deficit this year of roughly 450,000 ounces for platinum and about 857,000 ounces for palladium.
One key factor behind these deficits in these precious metals is the fact that South Africa is the biggest supplier of platinum and also a major supplier of palladium. Ongoing labor unrest there continues to see exports of both metals lagging badly.
Two countries – South Africa and Russia – together account for between 70% and 80% of the annual supply for these metals.
Couple lagging South African exports with slowing growth in auto catalyst recycling and steady demand from China and surprisingly, Europe, and you have the current recipe for a growing supply deficit.
Investment Demand Lagging
I strongly believe the momentum and platinum and palladium can grow even stronger.
Why? Because unlike gold, and to a lesser extent silver, ETFs backed by platinum and palladium have actually seen outflows, not inflows.
Platinum ETFs have lost about 80,000 ounces year-to-date. Palladium ETFs are even worse, with a loss of 120,000 ounces year-to-date.
These flows should reverse and begin to rise thanks to the current investing climate. That same climate – negative interest rates and QE from most of the world’s major central banks – is what has been behind the inflow of into gold ETFs this year of 17 million ounces.
Investment Choices in Precious Metals
Investors should go against the crowd selling platinum and palladium ETFs and look at buying investing vehicles backed by the physical metals.
A good choice that covers both metals is the closed-end trust, Sprott Physical Platinum and Palladium Trust (NYSEArca: SPPP).
If investors want to invest in one metal and not the other, there are the ETFS Physical Platinum Shares (NYSEArca: PPLT) and the ETFS Physical Palladium Shares (NYSEArca: PALL).
For investors willing to take more risk, there is one stock that interests me.
It is Russia’s Norilsk Nickel (OTC: NILSY), which is the world’s largest producer of palladium and a major producer of platinum. In addition, the company is the world’s biggest producer of nickel (which has also been rallying) and a large producer of copper.
Investments into these precious metals should continue to fare well in the current monetary environment.