One of the Rarest and Most Important Metals on Earth
It's one of the most important metals to the $2 trillion global auto industry...
Over 100 times rarer than gold...
And in 2008, it sold for over $10,000 an ounce!
Prices have now dropped to about $750 an ounce.
But the demand for the ultra-rare metal is always increasing.
I'm talking about a commodity that you may not be familiar with: rhodium
Rhodium is part of a group of metals called the platinum group metals. Along with platinum, palladium, ruthenium, iridium, and osmium, these metals have similar physical and chemical properties.
Rhodium is used in specialty optical instruments, electronics, aircraft turbine engines, and as a jewelry finish.
But the primary use for rhodium is for automobile catalytic converters — specifically three-way catalytic converters — which convert harmful hydrocarbon gases from auto exhaust into less harmful substances.
Autocatalyst manufacturing accounts for over 80% of the world's annual rhodium demand. So demand from the automobile industry is critical for rhodium.
And while the short-term outlook for the auto industry may be questionable, with slower growth in places like China and Europe, global light-duty automobile demand is expected to double by 2019 and nearly triple by 2024.
That might be a problem for end users...
Because rhodium production is extremely limited.
Rhodium is one of the rarest metals on Earth — so rare that a year's worth of total global production could fit on the back of three pick-up trucks.
In fact, there are fewer than 10 mines in the world that produce significant quantities of rhodium. And most of those mines are located in one single country: South Africa.
South African mines provide 80% of the world's rhodium supply. And this concentration of mining operations often leads to extreme price volatility.
In 2008, supply shortfalls from South Africa caused rhodium prices to spike to over $10,000 an ounce.
The economic slowdown of that year eventually caught up with rhodium, leading to a collapse in prices.
Rhodium prices recovered a bit following the price collapse. But rhodium is often recycled from old catalytic convertors. And an increase in recycling beginning in 2008 actually lead to an oversupply in the market — eventually pushing prices down to where they sit today at about $750 an ounce.
The rhodium market is expected to remain in supply surplus this year. However, growing demand over the long term is expected to bring back a supply deficit.
But even though rhodium's supply/demand fundamentals seem solid — and the upside astronomical, with prices once at $10,000 an ounce — I don't think the metal makes for a good investment.
That's simply because there are serious issues with investing in the metal.
Up until just a few years ago, there was almost no way to invest in rhodium.
Kitco sold a rhodium “sponge,” which is just industry parlance for a powdered form of the metal. But that was about it.
In 2009, the Cohen Mint was the first to produce .999 fine rhodium bullion rounds and bars.
More recently, the Baird Mint has introduced a line of physical rhodium bars, which are available in one- and five-ounce bars, as well as fractional sizes one-tenth, one-quarter, and one-half ounce.
However, the premiums for rhodium bullion are outrageously high. Provident Metals has a near 100% premium on a Baird Mint one-tenth-ounce rhodium bar.
Liquidity is also going to be a major issue with owning physical rhodium. An investment-size holding is going to be extremely difficult to sell.
Your local bullion dealer is probably not going to want to buy your rhodium when it comes time to divest.
Owning the physical metal is probably best simply as a curiosity.
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For direct exposure to physical rhodium, an ETF would probably be the best choice for investors. And there is one...
Deutsche Bank launched a rhodium ETF (LON: XRH0) in 2011 that is 100% backed by the physical metal.
However, the ETF doesn't trade on any of the American exchanges — meaning it might be difficult for some to buy and sell.
And XRH0 barely trades. The average daily volume on the thing right now is 547 shares a day. So at $72, there's an average of less than $40K in daily interest in XRH0.
Compare that to one of the gold ETFs — SPDR Gold ETF (NYSEArca: GLD) traded over a billion dollars in shares yesterday. And volume was about 3 million shares less than the three-month AVD. And that's just one of the gold ETFs.
As far as rhodium stocks go, there are no pure or even primary metal plays.
Rhodium is so rare that there are simply no mines that produce the metal as a primary product. So mining companies only produce rhodium as a byproduct. And these mining companies all have different primary interests. Larger outfits include:
- Anglo American Platinum (JSE: AMS)
- Norilsk Nickel (MCX: GMKN)
- Impala Platinum (JSE: IMP)
- Lonmin (LON: LMI)
Despite solid supply/demand fundamentals — and extreme potential upside — and because of liquidity issues and the lack of good investment platforms and general interest, I don't think rhodium makes for a good investment.
Ultimately, a bet on rhodium is a bet on demand from the auto industry. And with rhodium's investment issues, I would simply recommend investors look to either platinum or palladium:
- They are just as vital to autocatalyst manufacturing.
- They are also much rarer than gold or silver.
- They have the same kind of concentrated supply issues.
- They have well-established investment and trading vehicles.
Although the upside to rhodium could be huge, I think there are much better metals for investors on the market.
Until next time,
Energy and Capital
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