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A Brighter 2019? Palladium or Gold ETFs

Sanghamitra Saha
Positive Development on U.S.-China Trade War Front

Palladium prices have been on a tear of late. The pure-play palladium ETF Aberdeen Standard Phys PalladiumShares ETF PALL is up more than 23% this year (as of Feb 25, 2019) and 44.8% in the past year.

Price of palladium is set to see the seventh straight month of a rise. The white metal has more than tripled since January 2016, per Bloomberg. The rally has mainly been backed by growing global demand and stagnating supply as well as the latest strike threat in the South-African mining industry.

Notably, the automotive industry, mainly involved in the manufacturing of catalytic converters for vehicles, is a big driver for palladium. In fact, platinum-using diesel-fueled cars are actually experiencing market share loss “amid an environmental backlash.” Stringent emission control norms have been fueling demand for Palladium-using petrol-fueled cars.

While supplies from major producers, including Russia and South Africa, are not growing (per analysts), demand has been on the rise on increased consumption of gasoline engines. Several sources estimated global inventory between 10 million and 18 million ounces, which can meet demand for about one to two years, per Heraeus, a refiner, quoted on Bloomberg.

How Dazzling is This Year for Gold?

The fundamentals of the gold mining space strengthened, thanks to heightened market volatility, which led to a dovish Fed. The Fed has taken a patient stance toward rate hikes. This kept a check on treasury bond yields and the greenback, which in turn is favoring gold prices as well as mining stocks and ETFs. SPDR Gold Shares GLD is up 3.4% this year (read: Will Gold Mining ETFs Keep Sizzling Despite Mixed Earnings?).

A Brighter Future for Which Metal?

Palladium: Pros & Cons

Citigroup Inc. sees palladium prices hitting $1,600, meaning about 6% rise from the current level. The global deficit looks to “widen dramatically” this year, per Johnson Matthey Plc, a leading maker of autocatalysts, and BlackRock Inc.’s Evy Hambro told Bloomberg TV also sees a “massive shortage” due to ever-growing demand from the auto market.

However, we would like to note that the future of palladium is uncertain. Markets in Europe and North America have also been facing the brunt of global growth issues. Ride-hailing services are chopping off the necessity of owing a vehicle. Some analysts are of the view that palladium “has risen too fast too soon and was bound for a correction.”

Moreover, after a stupendous rally in palladium, investors will try to book profit, which in turn will put a check on the rise in palladium. Plus, there is increasing adoption of electric vehicles which could affect demand for platinum and palladium in auto-catalysts, per an article published on Reuters.

Gold: Pros & Cons

If the U.S.-China trade deal takes place, treasury yields should go higher, hurting gold prices. The uptick in risk-loving sentiments does not go well with bullion investing. But then, China is investing heavily in gold. PBOC added about 11.8 tons to its reserves in January. The latest addition comes after the December purchase of just under 10 tons of gold, the first time the central bank raised its reserves since October 2016. 

Analysts at Commerzbank believe that the past trends back the case for further buying this year. Not only PBOC and traders, Chinese consumers also bought gold heavily this lunar new year.

Thus, it depends on global growth tensions; in presence of this gold ETF will rally. And if growth worries alleviate soon, industrial metal palladium should see brighter times ahead. Also, if there are prolonged strikes in South African mines, palladium will likely outshine gold.

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Aberdeen Standard Physical Palladium Shares ETF (PALL): ETF Research Reports
 
SPDR Gold Shares (GLD): ETF Research Reports
 
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