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Palladium outperforms platinum as US auto sector outperforms EU’s

Auto sales growth is driving performance for palladium and platinum

Demand for precious metals doesn’t just come from investors looking to hedge geopolitical and currency risk. These substances are also used in alloys and as catalysts in manufacturing. In particular, over 50% of the supply of platinum and palladium is used in catalytic converters for automobiles. Palladium is used for autos in the US and platinum is used for autos in the EU. As automobile demand has recovered much faster in the US than in the EU, palladium demand has surged, outstripping supply in 2012 and likely again in 2013.

2013 10 13 autoEnlarge Graph

 

Palladium is also used in catalytic converters for autos in China, giving palladium another tailwind versus other metals, as car ownership continues to grow there.

Like other precious metals, however, palladium and platinum are influenced by monetary policy

The taper talk over the summer hit all precious metals hard, as expectations for a stronger dollar led traders to sell gold, silver, platinum, and palladium. The high volatility of these commodities is to be expected, as uncertainty about the future of monetary policy has been the biggest driver of investments in 2013.

2013 10 13 PALLEnlarge Graph

 

Treat precious metals as a portfolio diversifier—and nothing more

I continue to advocate precious metals as part of a diversified portfolio containing stocks and bonds as a source of uncorrelated risk exposure for investors. The high volatility of these products can be difficult for investors to bear, but they should receive no more than a few percentage points in your asset allocation. This level of investment gives investors the diversification benefits while shielding them from periods of significant underperformance, such as 2013.