The Precious Metals Pair Trade

As you read this, I’m speaking at the New Orleans Investment Conference. But there’s one thing I can’t fit in my presentations. Let me share it with you now.

Have you seen the price of palladium lately? Wow, this metal is on a rocket ride. This gives us an opportunity. But it’s not to go long palladium. In fact, you might consider shorting that metal — and going long an undervalued precious metal. A metal I’ll get to in a bit.

But let’s talk about palladium. Specifically, what caused it to rally 37% from its low in August to its high in October …

First, new car registrations rose in Europe. Gasoline-powered cars use catalytic converters with palladium. So that put the vroom-vroom in palladium sales.

Second, under the cloud of a trade war, the Chinese government is trying to stoke the economic furnaces. This is bullish for metals generally.

Third, palladium is already experiencing a supply/demand squeeze. This is the third year in a row that mine production can’t keep up with demand.

All this was enough to shift palladium prices into higher gear.

Even after pulling back from its highs, palladium is still trading above $1,000 an ounce. And you know what? That is expensive, at least compared to a metal that can substitute for palladium.

I’m talking about platinum.

Look at this chart of how palladium has performed against platinum recently.

In fact, palladium is at its highest level compared to platinum since 2001. While palladium was recently trading above $1,067 per ounce, platinum was recently at $840.

And that’s interesting, because the world only produces 5.9 million ounces of platinum per year (via the latest statistics from Johnson Matthey) while 6.57 million ounces of palladium were produced.

To be sure, there is a good reason platinum prices took a hit. Platinum is the main metal used in diesel catalytic converters. And clean diesel has turned out to be a complete lie, a lie pushed by Volkswagen and other companies.

So, platinum fell, and palladium rose. But again, while it takes some engineering — an investment of time and money — car-makers can substitute platinum for palladium.

Now, there’s nothing saying the prices of these metals must go up. They could both go down. We recently saw bad news in auto sales in China. If that weakness spreads around the world, auto-catalyst metals could fall.

But my view is that, in this case, palladium is set for a bigger fall than platinum.

And that brings me to my original point: If you’re in the market for a precious metal pair trade, consider going short palladium and long platinum.

And you don’t have to trade in the futures market to do it. The Aberdeen Standard Physical Palladium Shares ETF (NYSE: PALL) tracks palladium closely and has decent trading volume. Meanwhile, the Aberdeen Standard Physical Platinum Shares ETF (NYSE: PPLT) tracks platinum prices and has even more trading volume.

All the best,

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One comment on “The Precious Metals Pair Trade

  1. Frank February 25, 2020

    This aged like bread