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Palladium Investing and the Lithium Revolution

Written by Luke Burgess
Posted March 21, 2016

It's not as sexy as gold, silver, or platinum...

But it's just as important to the global economy.

Palladium is actually very special among the metals.

The metal is highly resistant to wear and tarnish, making it well suited for applications like jewelry. Palladium also has very stable electrical properties and has become a key material for electrical capacitors and semiconductors — the organs of all of our plug-in gadgets.

But among palladium's most useful properties is as a chemical catalyst.

Palladium has a special ability to absorb up to 900 times its own volume of hydrogen.

And that makes the metal a key material for automobile catalytic converters — which convert harmful gases from hydrocarbon emissions, such as carbon monoxide and nitrogen dioxide, into less harmful substances.

You have one under your car...

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Pretty boring, right?

Well, they're only boring until you realize the investment upside...

Globally, annual light-duty vehicle sales are expected to double by the end of the decade and triple by 2025.

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And the extreme majority of these vehicles are going to require catalytic converters with either palladium or platinum — despite the electric vehicle and lithium revolution.

Here's what most people are forgetting...

Any car that burns hydrocarbon fuel like gasoline or diesel requires a catalytic converter.

All plug-in hybrid electric vehicles (PHEV), which burn either gasoline or diesel, require catalytic converters.

In other words, PHEVs will require both lithium for their energy storage batteries and palladium or platinum for catalytic converters.

The only cars that don't require catalytic converters are battery electric vehicles (BEV), which don't burn any hydrocarbon fuel.

Now, the BEV market is an extremely profitably industry right now. But that's because BEVs still only hold about 1% of the total global vehicle market share — and that market is growing like wildfire.

However, even the most optimistic outlook on the BEV market doesn't expect that the global market share for battery electric vehicles will cross 10% until at least 2030.

The majority of the “electric” vehicles are expected to be hybrids — which means the world is still going to need a lot of these babies.

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Still looking boring?

Now, here's where things really get interesting for palladium...

The global palladium market has been in a supply deficit since 2012. And palladium prices increased about 30% until the summer of 2014, peaking at $900 an ounce.

That's when the price of oil fell off a cliff.

And the price of palladium has followed.

That's because mining operations are extremely energy intensive — meaning energy costs can significantly impact production costs.

And as energy prices have fallen since the summer of 2014, so have overall mining production costs. This has allowed palladium producers to sell into lowering market prices while maintaining rising revenue.

Crude Oil WTI Cash Spot Price Palladium Cash Spot Price
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But lower energy prices can only suppress palladium's price for so long. And that's simply because the metal is so rare.

Palladium is actually about 15 times rarer than platinum — and 30 times rarer than gold.

Meanwhile, palladium spot prices currently sit about 40% lower than platinum and at half the price of gold.

Palladium prices are extremely volatile. For the month of March alone, the price of palladium has already increased 14% — increasing from about $515 an ounce on March 1 to about $587 an ounce today. So investors should be aware of near-term risk stemming from profit-taking.

But even with palladium prices approaching $600 an ounce, there is limited downside risk.

As a precious metal, its value will never go to $0. And as a very rare yet extremely important industrial metal, palladium's incredible catalytic properties also add to its intrinsic value.

How I'm Playing Palladium

As I just mentioned, I think there could be some near-term downside to palladium prices due to profit-taking. So I'm looking to re-enter the palladium market if prices dip below $550 an ounce.

Several weeks ago I bought ETFS Physical Palladium (NYSEArca: PALL) shares for a short-term trade. I saw a decent profit, although I sold a bit early.

But I'm looking to get back into PALL if palladium prices move back into the $550 range. I think you should be, too.

Keep an eye on palladium,

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Luke Burgess
Energy and Capital

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