I like to consider myself a
contrarian
investor. Zigging when others are zagging is usually the surest way
to find underpriced stocks and avoid overheated ones that are due
for a pullback.
But this time, the crowd just might be right.
As it turns out, analysts and investors have been singing the same
tune -- at least when it comes to the outlook for a certain rare
metal.
Let me explain...
Back in January, I made abullish call on platinum in my
Scarcity & Real Wealth
advisory and pointed out a few reasons why it was likely to bounce
in 2012. At the time, the metal was trading for $1,360 an ounce --
today, it sells for about $1,600 an ounce.
Meanwhile, the
ETFS Physical Platinum Fund (
PPLT
)
has already climbed about 15% for the year.
So far, so good.
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As a close sibling, palladiumshares many of the same traits and
uses, most notably as a key component in automobile catalytic
converters. The main difference is that palladium has historically
been favored in gasoline engines, whereas platinum is more common
in diesel.
But diesel makers are increasingly turning to palladium because
it's cheaper.
Global carmakers are widely expected to roll out 80 million
vehicles this year. Those cars and trucks will leave the assembly
lines with 6.24 million ounces of palladium -- 6% more than what
was consumed last year and a new record high, according to Barclays
Bank,.
Where will the metal come from?
Russia's main mining giant is more concerned with nickel production
(which accounts for 90% of sales). And South African producers have
been plagued by energy shortages and labor disputes. The country's
output is expected to be the thinnest in years.
This will likely be the sixth consecutive year of falling global
mine production.
To cover the shortfall, palladium suppliers have been dipping into
secondary, above-ground sources, namely a strategic stockpile in
Russia. But this key source is running dry and may almost be
depleted.
With more cars on the road and fewer supplies coming out of key
mines,market forecasters are bracing for a palladium shortage of
215,000 ounces this year. And thanks to the introduction of
commodities-backed exchange-traded funds (ETFs), it's pretty easy
to gauge the investment community's appetite for specific
metals.
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Russia shipped just 500,000 ounces of palladium ingots and powder
to Switzerland (one of Europe's two main storage hubs) in 2010, the
lowest amount in 15 years. Barclays says Russian shipments will
plunge to just 300,000 ounces this year and may be exhausted
altogether by 2014.
Right now, people are clearly hungry for palladium.
This
deficit
is a big reason why ETF investors from New York to Zurich are
suddenly hoarding the metal.
There are 58.9 metric tons of palladium stockpiled in ETF bank
vaults, according to
Bloomberg
. This total represents a healthy 14% increase in palladium fund
holdings since the start of the year -- the strongest quarterly
increase since 2010.
Palladium prices on the London Metals Exchange have been
essentially flat, but fund assets have been rising sharply, thanks
to new inflows from shareholders -- cresting at $1.23 billion last
week.
It's no coincidence that 11 top metals analysts are forecasting
palladium to surge to $850 an ounce by the end of 2012.
This implies a 33% increase from current levels near $640, which
easily bests the price
appreciation
outlook for silver (13%) and gold (15%).
Action to Take -->
In 2001, the last time we saw a major supply shortage, panicked
buyers went on a binge that pushed palladium
spot
prices to a record $1,100 per ounce.
There may not be a repeat of that, but there are sound reasons why
palladium remains a good long-term bet. The metal exhibits many of
the characteristics that I pound on the table in my
Scarcity & Real Wealth
advisory -- it's a scarce (and dwindling) resource with growing
global demand and real tangible wealth. In a world of crooked
politicians, paper money and ballooning government debt, it's
essential that investors own investments exactly like this one.
First Trust Global Platinum (Nasdaq: PLTM)
is an ETF that offers undiluted exposure to platinum and palladium
producers. The fund enjoyed a nice 8.3% bounce in the first
quarter, but I think there are more gains in store for shareholders
through the remainder of 2012.
[
Note:
My newsletter
Scarcity & Real Wealth
, aims toprofit from the rarest and most valuable assets on the
planet -- gold, commodities, energy, and other natural
resources. These critical inputs are in short supply, yet
worldwide demand is exploding, making these rare assets some of the
best investments on earth. To find out more,
go here
.]
-- Nathan Slaughter
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.