Time to Buy This Precious Metal ETF?

The precious metal space has been under pressure for much of 2013 as safe haven assets were shunned in favor of high growth products. Hopes of Fed tapering had further put pressure on precious metals as the dollar continued to gain strength (Precious Metal ETFs Crumble in Fed Meeting Aftermath).

However, the Fed decision of ‘No Taper for now’ once again bought life back to precious metals. While gold and silver bounced back to trade higher, one metal which may have been overlooked by investors during this trend towards a reversal is palladium.

Metal in Focus

Palladium is one of the most popular niche commodities and can be considered an extremely lucrative investment avenue. Last year, the metal lost its momentum somewhat, attributable to a weak automobile sector and sluggish demand for jewelry.

However, with some new trends in the space, there is plenty of hope for a return to glory for this metal in the very near future (Inside the Palladium ETF's Recent Surge (PALL)).

Primary Driver

The primary driver behind this strength in the metal is the Automobile sector. The automotive industry is a big driver of demand in the palladium market, specifically in catalytic converters to manage vehicle emissions. With a rebound in the auto industry, the demand for the metal remains steady.

Investors should note that auto sales in the U.S. are holding steady at over 15 million units (annual rate). This keeps the streak of months with the rate of sales above 15 million alive, and suggest that the automobile market is quite strong (These 3 ETFs Could Soar on Strong Car Sales).

Additionally, the Fed’s decision to keep interest rates low will further provide a boost to the sector as customers will be offered cheap financing thereby increasing the demand for cars. This will eventually result in increase in demand for palladium metal.

Also, with car sales picking up in Europe and China emerging as the strong market for vehicles, the demand for the metal will shoot up leading to further upside in the metal.

ETF in Focus

With the auto industry expected to remain robust globally going forward, and demand for the metal and consequently its price on the rise, investors may be able to take advantage of palladium. For those who are willing to go long in palladium, the following ETF option is available:

ETF Securities Physical Palladium Shares (PALL)

For a bullion-backed approach to palladium ETF investing, investors can look to ETFS Physical Palladium Shares or PALL. PALL is an ETF which is backed by physical metal and holds the metal in the form of bullion, or ingots. The metal is securely stored in London and Zürich on behalf of the custodian, JP Morgan Chase Bank.

Investing in PALL represents a cost-effective and suitable mode for investors. The transaction costs for buying and selling the shares will be much lower than purchasing, storing and insuring physical palladium for most investors (Palladium and Platinum ETFs to Soar?).

This ETF is designed to track the spot price of palladium bullion. PALL is the most liquid option available in palladium ETF space, trading with volumes of 78,000 shares a day and it has $510 million in assets under management.

The expense ratio of 60 basis points also appears to be on par with other ETFs in the precious metals space, although it is obviously higher than what we see in the much more popular gold market. The fund delivered a return of 20.5% over a period of one year.

Bottom Line

Palladium will continue to see strong demand as the auto industry continues to grow. Also, auto sales in China are expected to improve if the government renews some of its policy incentives that helped the country overtake the U.S. as the biggest auto market.

According to the Chinese government, total vehicle sales in China are expected to rise 7.8% to 20.8 million vehicles in 2013 from 19.3 million last year, led by strong demand for passenger vehicles and economic recovery. So in all, palladium represents a good investment opportunity in the precious metals space.

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