PGM Update

This has been a terrible month for precious metals and especially metals in the PGM space. Even though it seems platinum “caught a bid” last week palladium has taken it on the chin. For the squeamish investor this is certainly discouraging news but it’s never easy being a contrarian.  We continue to believe in the PGM growth story as we highlighted in previous analysis;   A Palladium Growth Story - Commodities Should Look Interesting to Contrarians and Look to Platinum and the PGM in 2015.

There have been a few notable headlines regarding palladium recently, the most interesting story from Mineweb that states, “Russia’s central bank has agreed “in principle” to sell some of its palladium stock to a fund of investors led by Norilsk Nickel.” The sale is taking place because of favorable market conditions for the metal and Norilsk seeks “to guarantee the availability of stock for long-term customers and to increase market transparency.” On the surface that seems reasonable but this investor thinks it has more to do with the financial condition of Russia and its need for cash in light of the recent geopolitical turmoil and resulting sanctions as well as the oil bear market.

That said, I agree with the general concept that palladium remains an attractive investment even though it is falling out of favor. Palladium ETF’s suffered massive outflows last week that negatively impacted prices. According to a recent report by Reuters “Palladium ETFs, popular investment vehicles which issue securities backed by physical metal, saw outflows of nearly 50,000 ounces in the week to Friday”

Theoretically one can understand the somewhat dour mood when it comes to PGM. The end of quantitative easing and loose monetary policy in this country, non-existent inflationary pressures, a general commodities bear market and the strong U.S. dollar all provide a headwind for palladium appreciation. Alhambra Investment Partners recently pointed to dollar woes and flat lining wages as a cause for slowing auto sales. As we all understand, the importance of auto sales is paramount for palladium demand. Alhambra goes on to say, “The March figures are only estimated based on the pace of sales through March 11, which is already a problem if the trend like February holds – the first estimate for February was for a new car pace of 13.5 million SAAR but is now estimated significantly below that at 12.7 million (total vehicle sales first estimate was 16.7 million, revised down to 16.2 million). As you would expect, snow is being blamed for the discrepancy in the month, and we will see how it plays out in March, but even if the current estimates hold up they represent essentially no sales growth over March 2014.”

So how concerned should we be regarding the demand for palladium?

We continue to believe that Palladium demand offers attractive supply and demand dynamics. The March vehicle sales were not as dour as presented by Alhambra Investment Partners.  US auto sales for March registered an annualized rate of 17.05 million units beating the consensus forecasts for 16.90 million units. According to the Fiscal Times (Via Business Insider), “Car-buying service TrueCar expects that 17 million new vehicles will be sold this year. That would represent a year-over-year increase of as much as 3 percent. The estimate is in line with forecasts done by Bank of America Merrill Lynch analyst John Murphy and the National Automobile Dealers Association. For the auto industry overall, revenue is expected to have jumped 89 percent this year over 2009, according to TrueCar. “The industry hasn’t been at the 17 million-unit level since 2005, and considering that the U.S. population has expanded by roughly 9 percent since then, it’s clear we’re in a market with strong natural growth drivers,” said John Krafcik, TrueCar’s president, in a press release. “Even in the economic boom years of the 1990s the industry didn’t achieve six consecutive years of growth.”

But is the supply demand picture enough to drive the price of palladium higher. I recently sat with the folks at CPM Group to discuss the virtues of PGM and they made an excellent point. Their clients have expressed PGM fatigue and are no longer willing to wait for the desired outcome. Withdrawals from platinum and palladium ETF’s are at record highs and investor sentiment surrounding PGM is lousy. The general bear market for commodities has had a profound impact of PGM prices even though the underlying fundamentals remain sound. I read an interesting article that said something similar.  MetalMiner points out, “A bearish commodity environment, a strong dollar and low oil prices are punishing palladium prices as well as the rest of precious metals. Despite the apparent positive palladium fundamentals, the big picture better change or the bank will see its price forecast come in way off from reality.”

It is true that negative investor sentiment, the stronger dollar and the threat of tighter monetary policy all provide a headwind for PGM investment, but the recent economic data leads this investor to believe that all is on rosy on the U.S. economic front. March jobs report showed job creation but not nearly as much as expected, durable goods has been soft and retail sales have shown curious weakness given the price of gasoline.  

It seems we are seeing the all-too-familiar start and stop economic growth that has plagued us since the great recession. The only difference now is that the Fed has backed off their quantitative easing stance that appears to have been the support for the economy when things started to dwindle. So with the economy showing lackluster growth (not recession) and no quantitative easing on the horizon, this may delay the Fed’s decision for tighter monetary policy and thus cap the strength behind the U.S. dollar.

We’ve noted in the past and still believe that, given the supply and demand dynamics surrounding palladium, it offers an attractive investment opportunity for those that are not concerned about the near-term volatility. In light of the weaker than expected economic growth and the potential for a more dovish Fed and subdued U.S. dollar, this may be the perfect environment for PGM to shake the negative sentiment that surrounds it as an investment opportunity.

Joseph S. Kalinowski, CFA

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