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Forget Gold, Palladium ETF is Shining the Brightest

Sanghamitra Saha

Precious metal investing is ina tug of war between geopolitical tensions and a hawkish Fed. This is especially true for gold which is viewed as a safe-haven asset (read: Gold ETFs Tussle Between Geopolitics and Fed).

Overall, gold ETF SPDR Gold Shares GLD lost about 0.3% in the last three months (as of June 20, 2017). Silver was even more battered with iShares Silver Trust SLV losing about 6.1% in this time frame. However, there is one metal that is hovering around a 16-year high and that is palladium. ETFS Physical Palladium PALL advanced 10.8% in the last three months (as of June 20, 2017).

The Fed has hiked interest rates twice this year and may go for another hike by the end of 2017. Ideally, this should boost the greenback and hurt the metal’s investing. But while other metals reacted slightly to the June Fed hike, palladium shrugged off Fed worries and stood tall.

What’s Behind the Rally

Going by an article published on Financial Times, “the palladium market is witnessing a rising deficit,” as per UK chemicals multinational. In fact, in 2016, the palladium market saw five successive years of significant deficits. And 2017 will possibly mark the sixth. This is in contrast to its contemporary metal platinum, which is seeing “its first surplus in six years.”

Notably, the automotive industry, mainly catalytic converters for vehicles, is a big driver of demand for palladium. Palladium-using petrol-fueled cars are “the primary type sold in the two largest markets of China and the US,” as per the source. So, increased usage of petrol-driven vehicles are contributing to the palladium price rally.

In fact, platinum-using diesel-fueled cars, are actually experiencing market share loss “amid an environmental backlash”, going by the above source. And platinum’s loss is turning out to be palladium’s gain.

Some analysts are now strongly expecting to see palladium prices breezing past platinum prices. If this happens, it would be “the first time since 2001 that palladium is worth more and its relative strength is even more remarkable given that the gap averaged just over $1,000 an ounce between 2007-2012.”

In a nutshell, the global supply outlook appears fragile at the current level, making the metal an intriguing investment option. Below we have highlighted the only pure-play on the metal – PALL – in detail (see all Precious Metals ETFs).

PALL in Focus

For a bullion-backed approach to play palladium, investors can look at ETF Securities Physical Palladium Shares or PALL. The ETF holds the metal in the form of bullion, or ingots. The metal is stored in London and Zurich on behalf of the custodian, JP Morgan Chase Bank.

Investing through PALL in palladium is cost-effective and most appropriate. The transaction costs for buying and selling shares will be much lower than purchasing, storing and insuring physical palladium for most investors.

This ETF is designed to track the spot price of Palladium bullion and has amassed about $209.9 million in assets. The expense ratio of 60 basis points appears reasonable in the precious metals ETF space. The fund trades in paltry volumes of about 40,000 shares on average daily basis. The fund has a Zacks ETF Rank of 3 with a ‘High’ risk outlook (read: 5 Commodity ETFs That Bucked the Downtrend in Q1).

Can the Surge Continue?

Though palladium prices are on the rise, decelerating sales growth in the two key gasoline vehicle markets — the U.S. and China – may curb the rally. The U.S. auto industry is in a tight spot this year with sales declining for the fifth successive month (read: Should You Steer Clear of Auto ETFs & Stocks on Weak Sales?).

The relative strength index of the fund currently stands at 60.92. This means the fund is about to enter the overbought territory. So, investors with a greater risk appetite can tap this soaring ETF for some more time.

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