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Crimean Storm Clouds Gather Over Palladium

Prices for palladium this past week touched a near 2.5-year high – above $780 a troy ounce, and up nearly 10% since December, alone.

And for a very good reason.

The geopolitical struggle in Crimea threw a bright spotlight on the supply of palladium – a precious metal used extensively in vehicles’ catalytic converters.

Some investors fear that the United States and others could place economic sanctions on Russia for interfering in Ukraine. Or in retaliation, Russia may withhold much-needed supplies of the metal.

Either way, palladium exports from Russia could be in jeopardy.

Palladium Supply Kings: Russia and South Africa

Add to that possibility the ongoing strikes in South Africa – six weeks and counting – and you could have quite a nasty situation with regard to global palladium supplies. 

South African labor strife is expected to lower palladium output this year by 280,000 ounces. This is the equivalent of 4% of last year’s 6.5 million ounces of palladium mined globally. 

You see, Russia and South Africa accounted for nearly 80% of global palladium supply last year. Russia, alone, accounts for more than 40% of global supplies.

These geopolitical and labor problems are adding to an already-tight supply outlook for the metal. Even before Ukraine hit the headlines, industry experts were forecasting demand to outpace supply this year by nearly 800,000 ounces.

The largest global supplier of palladium, Russia’s Norilsk (NILSY), said last summer that the gap between supply and demand was widening and may reach 60 metric tons by 2020.

Norilsk also gave insight on what has been bridging the gap between supply and demand for years: secret Russian government stockpiles of the metal. Norilsk believes that these once-mountainous stockpiles may disappear altogether in 2014, tightening supplies even further.

Let’s not forget, either, that against that dwindling supply situation, you have rising demand. Catalytic converters for gasoline-powered vehicles account for 77% of overall palladium usage in 2013.

Bear in mind that the two largest vehicle markets – the United States and China – are dominated by gasoline-powered vehicles.

Not only is the U.S. vehicle market growing nicely, but China (now the biggest vehicle market) also saw growth last year of nearly 14% to about 22 million vehicles. And another double-digit sales gain is expected in China this year.

Palladium ETF Investments

Add it all up, and it seems to be a good time to look at exchange-traded investment vehicles that are backed by physical palladium.

Investors have a couple of choices among ETFs with regard to physical palladium.

The first is the ETFS Physical Palladium Shares (PALL). This exchange-traded fund is backed by physical palladium bars held in vaults located in London and Zurich. The expense ratio of the ETF is a reasonable 0.60% annually.

Another interesting play is the Sprott Physical Platinum and Palladium Trust (SPPP). This closed-end trust invests in both palladium and platinum, equally. Again the palladium is held in London and Zurich vaults, and management/administration fees are 0.85%.

The difference here is that investors may actually request that the physical metal be sent to them. However, the minimum for such a request is 25,000 shares.

These ETFs will look great if, as some analysts are predicting, we see palladium approaching $1,000 an ounce due to limited supplies.

And “the chase” continues,

Tim Maverick

Tim Maverick

, Senior Correspondent

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