Tight supply, and continued demand for growing car and truck markets, should keep expanding the metal's price.
By SIMON CONSTABLE
Here's something to put a shine in your portfolio: Palladium, the often-overshadowed cousin of the precious metal platinum, is poised to gleam brilliantly.
Thanks to both rising demand and sketchy supply, some analysts are looking for a 20% jump in futures prices this year, with continued growth through 2014.
"We are most bullish on palladium among all the precious metals," says Rohit Savant, a senior commodity analyst at New York-based consulting company CPM Group.
The diminutive size of the market means that even small changes in production or use have a real impact on prices. Fewer than 10 million ounces of the palladium hit the market in 2011, compared with 127 million ounces of gold, according to CPM.
Demand for the metal should swell, as the global market for cars and trucks picks up. Around half of all palladium production goes into making catalytic converters, which scrub toxic chemicals from motor exhaust.
"Palladium is now being used in every auto-catalyst produced," says CPM's Savant.
Savant sees 5.05 million ounces of palladium going to catalysts in 2012, up from 4.7 million last year. He also forecasts steady use in electronics, ticking up to 1.3 million ounces this year from 1.2 million last year.
As demand shines brightly, supply is cloudy at best.
Palladium primarily comes from South Africa and Russia, accounting for 33% and 30% of total supply, respectively, according to CPM's data. But each country has problems.
South Africa faces continuing political unrest, production stoppages due to safety issues and electricity-supply problems—all of which could interrupt mining, says Matthew Turner, a strategist at Mitsubishi Corp. International in London.
Russia has steadily fed palladium to the market for decades, through sales of state stockpiles.
This seems to have come to an end. "That may be because there is none left, or because they have reached a level the government is content to keep," says Turner. The truth is murky.
CPM's Savant sees palladium futures prices soaring to $850 a troy ounce in the fourth quarter, and averaging $772 in 2013. Mitsubishi's Turner predicts that $1,000 in 2013 or 2014 is possible.
The most actively traded palladium futures settled Friday at $701.70 down 1.2% for the week on the New York Mercantile Exchange.
Of course, all bets are off if the global economic recovery falters and demand for cars falls. Likewise, lack of supply constraints could take the luster off any rally.
But if you are still game, you might burnish your portfolio through:
• Bullion-grade palladium coins, like those produced by the Royal Canadian Mint. Bullion coins are sold solely on the basis of their metal content, rather than their finish. Be careful with how much of a premium you pay over spot prices. You also need to worry about safely storing the coins.
• Exchange-traded funds, which holds inventories of the metal through such vehicles as ETFS Physical Palladium Shares (ticker: PALL).
• And of course, palladium futures themselves.
Link to Barrons.com.