Director, Commodities Strategist, ETF Securities
Gold is up nearly 20 percent in 2016, with investors flocking into the yellow metal for its potential safe-haven benefits as the market evaluates central bank policies and volatility in equities. While the gold rally continues to dominate financial headlines, investors may be missing other precious metals opportunities.
Investors seeking investment alternatives to gold should take a closer look at platinum and palladium. We believe these shiny white metals offer investors great price entry points and powerful long-term growth drivers. Specifically, here are six reasons why investors should consider adding platinum and palladium to their portfolios.
According to the International Platinum Group Metals Association (IPA), annual production of platinum and palladium amounts to around 440 tons, much less than many common metals.
Geographically, production is highly concentrated. 58 percent of world primary production of these metals takes place in South Africa and Russia accounts for an additional 26 percent.1 Nearly all of the rest comes from Zimbabwe, Canada, and the United States. Deposits in Russia and North America have high palladium contents while deposits in South Africa and Zimbabwe are richer in platinum.
As with any assets, investors need to know where they are putting their money. Most investors probably haven’t thought much about platinum or palladium since their last high school chemistry quiz, although they are probably more familiar with other precious metals like gold and silver.
Platinum and palladium are used mostly for industrial purposes such as the manufacturing of catalytic converters in automobile exhaust systems (platinum for diesel vehicles, palladium for gasoline) which convert pollutant gases into less harmful ones.
Across major consumer markets worldwide, auto sales are increasing and automobile manufacturers continue to increase per-vehicle loadings of each metal to meet more-stringent emissions standards worldwide, particularly in Europe, China and the U.S. These trends translate into highly favorable supply demand dynamics for platinum and palladium.
Coupled with an overall uptick expected this year in industrial production, platinum and palladium’s cyclical economic exposure makes them a potential ideal portfolio alternative. According to recent Bloomberg data, the white metals climbed to the highest level in more than three months, entering bull markets, on speculation that infrastructure spending in China will boost demand for the metals used in auto pollution-control devices. Last week, platinum posted the biggest gain since October, while palladium surged the most since 2001, helped by the outlook for low borrowing costs and rising auto sales in the U.S.
With favorable supply-demand fundamentals already in place, new emissions regulations could push prices even higher this year. For example, the World Platinum Investment Council and SFA revealed that the rollout of 2016 European emission regulations last year resulted in a 7% rise in platinum loaded into diesel cars.
1 Chamber of Mines of South Africa, Annual Report 2012; figure does not include recycling.
Other factors may also spark higher prices, including dollar depreciation, rising jewelry demand, South African labor unrest (which in 2014 halted mining for five months where 80% of the world’s platinum is sourced), energy security, or an acceleration of mine closings based on the dwindling return on investment (ROI).
For investors looking to add exposure to these precious metals to their portfolios, exchange-traded funds offer an easy entry point. They provide access to physically-backed, liquid assets offering pure exposure to the metals without any vaulting or operational issues of a mining stock.
For a typical investor who probably holds less than 5% of their portfolio in alternatives like commodities, platinum and palladium provide cyclical economic exposure in contrast to gold, which is more defensive in nature. And with industrial production expected to rise this year, platinum and palladium are well- positioned for growth.
So, while most people probably don’t know where platinum and palladium reside on the periodic table, investors seeking alternatives in the commodity space may be wise to seek them out.
Commodities and futures generally are volatile and are not suitable for all investors.
Carefully consider the fund’s investment objectives, risk factors, and fees and expenses before investing. For further discussion of the risks associated with an investment in the funds please read the prospectus at www.etfsecurities.com/etfsdocs/USProspectus.aspx or visit the ETF Securities website: www.etfsecurities.com.
ALPS Distributors, Inc. is the marketing agent for ETFS Silver Trust, ETFS Gold Trust, ETFS Precious Metals Basket Trust, ETFS Platinum Trust and the ETFS Palladium Trust.
ETF 000909 3/31/17
About the Author
Nitesh Shah is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).