PALL Abrdn Palladium ETF Trust

The most popular precious metal, gold, has seen rough trading to start 2013. As investors embrace risky assets in droves, this hedge has fallen by the wayside leaving many investors to look at other commodities for exposure in this climate.

Two increasingly popular choices are palladium and platinum, white precious metals which are both dominated by South African production (although a big chunk of palladium does come from Russia). While this hasn’t been much of an issue in the past, the increasingly onerous government presence in South Africa is beginning to weigh on miners in the region.

In fact, Cynthia Carroll, the CEO of Anglo American, the world’s largest platinum producer, recently stated that the ‘industry is in a crisis’ after the firm posted a $753 million loss for fiscal 2012. The company largely blamed an inability to shutdown loss-generating mines on the South African government, which has pushed to keep them open to improve the jobs situation in the nation.

However, despite the government’s resistance, costs in the country have risen while platinum prices haven’t kept up. According to Carroll, labor costs have increased by 8% in the past two years, while energy costs have surged by 19%, meanwhile, platinum was down about 3% in the time frame (read Invest Like Morgan Stanley with These 5 Commodity ETFs).

The problem hasn’t been limited to Anglo American though, so it is hard to blame mismanagement for this quandary. Some say that more than half the industry in South Africa is breaking even or posting a loss, suggesting that the trend isn’t very good at all for the producers in the country.

Yet given that platinum accounts for 5.5% of GDP in South Africa, it seems likely that the national government will not be too happy about more mine closures to say the least. This could keep miners under pressure across the country and it may derail production levels in the near term.

Outlook

This situation has helped to boost platinum prices as a smaller supply is generally bullish for commodities. Additionally, since palladium often occurs alongside platinum, many of the concerns over platinum are building over its cousin palladium as well.

Yet if one looks beyond the supply situation, the demand picture could also be improving. Many economies have entered a new bullish phase around the globe so this could also be adding to platinum and palladium gains this year (read Why You Don’t Need Both the Platinum and Palladium ETFs).

This is because, unlike gold, platinum and palladium are heavily focused on industrial uses so they often take their cues from the broad economy. As the global economic situation has picked up and as car sales—a key driver of platinum and palladium due to catalytic converters—have surged, there is some significant hope for platinum and palladium prices in 2013 (read Strong Auto Sales: Good News for Metal ETFs?).

Perfect Storm?

If these two trends of increased demand and reduced supply hold, it could be a very good year for platinum and palladium investors. This could be especially true if investors compare returns to gold, a metal that many believe may be facing some weakness, given the improving economic outlook.

For this reason, it could be time to cycle back into these high beta metals for the time being. While bullion purchases at a local coin dealership is one way to go, investors can also consider ETFs as well.

These funds still invest in platinum and palladium but do so in a much more liquid way. Instead of having to deal with sometimes massive premiums and discounts, shipping and storage, investors now just have to sit back and click a button. For those interested, we have highlighted two of the most popular ETFs that invest in the bullion of these metals, either of which could be interesting plays this year:

For a platinum investment, there is the ETF Securities Physical Platinum Shares (PPLT). This ETF charges investors 60 basis points a year, holding bars of platinum in a secure vault in Europe.

The fund is also a pretty liquid option, having volume of about 75,000 shares a day. In addition, it does have a rather large asset base with over $870 million in total AUM in the product.

Meanwhile, in the palladium world there is the ETF Securities Physical Palladium Shares (PALL). The fund also charges 60 basis points a year in fees and holds bars of its metal in a secure vault in Europe.

Unsurprisingly, given that palladium is relatively unknown, the product does have less in assets than its platinum counterpart, possessing about $550 million. However, thanks in part to its more volatile nature, it does see a bit more in volume in an average trading session (read Palladium ETFs to Rally in 2013?).

Bottom Line

Both PALL and PPLT are currently sporting a Zacks ETF Rank of 2 or ‘Buy’. This means that we are expecting good things out of both over the coming year.

Given the current supply issues in one of the key markets for both metals this could certainly be the case. If that wasn’t enough, demand could also surge, suggesting that 2013 could be a solid year for both the palladium and platinum ETFs for investors seeking a new precious metal play this year.

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Follow @Eric Dutram on Twitter

Author is long palladium and gold bullion.  

 
SPDR-GOLD TRUST (GLD): ETF Research Reports
 
ETFS-PALLADIUM (PALL): ETF Research Reports
 
ETFS-PLATINUM (PPLT): ETF Research Reports
 
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