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ETF Specialist

Palladium: Gold's Grittier Cousin

Palladium might not glitter like gold, but favorable supply and demand fundamentals are taking shape that might help it shine.

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Palladium certainly does not receive as much press as other precious metals, such as gold or silver, but it can be just as useful for investors. An investment in palladium is an indirect bet on the automotive market. From 2009 through 2011, the automotive industry accounted for 60% of the gross demand for palladium, a key input for catalytic converters. Industrial demand for palladium is cyclical. In fact, over the past three years, palladium’s beta relative to the S&P 500 Index was 1.25. Supply disruptions can also have a significant impact on palladium prices because more than 80% of the world's palladium reserves are concentrated in Russia and South Africa. Johnson Matthey, a leading catalyst producer, estimated that supplies coming to the market from Russian stockpiles declined 68% in 2012. Meanwhile, output from South African mines also slid last year, as mine workers went on strike and safety stoppages were implemented. In combination with supply-side constraints, a rebound in global auto production and the substitution of palladium for platinum in the light diesel market may increase demand and put upward pressure on palladium prices. 

 ETFS Physical Palladium Shares (PALL) offers exposure to the spot price of palladium minus expenses, by owning physical palladium bullion stored in vaults in London and Zurich. PALL could serve as a tactical bet on the global automobile industry, tightening emissions standards, or as a way to profit from a renewed strength in the consumer electronics market. 

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.