Palladium is probably near fair value

30 Oct 2009 by Jim Fickett.

A recent post looked at the extreme values in the gold price over the last 40 years, and concluded that the price was rather on the high side now. In this post we look at the average values, again over 40 years, of gold and other precious metals. The first conclusion, again, is that gold is rather high. The second is that palladium is near fair value, and a purchase now might serve as a long-term store of value.

Many people consider gold to be a long-term store of value. It is certainly true that governments cannot just print more gold, which is comforting. However the gold price is volatile, which means that if you want to store value you should either buy regularly or buy low. The following table shows, for each of silver, gold, palladium and platinum,

  • a recent price in current (nominal) dollars,
  • the current price in inflation-adjusted (1982-84, real) dollars, and
  • the average price in inflation-adjusted dollars over the last 40 years
  • the ratio of the previous two
22 Oct 2009 nominal 22 Oct 2009 real mean 1969-2009 real 22 Oct 2009/mean
Silver 17.66 8 6 1.3
Gold 1054.80 488 281 1.7
Palladium 334.00 155 135 1.1
Platinum 1359.00 629 385 1.6

All four metals are above their long-term average price; gold most of all. What this means is that buying gold now as inflation protection only protects from truly disastrous scenarios, because you have already taken a big loss. In other words, a lot of other people already got in the game, and it is rather late to dive in now.

Note that the palladium price is only slightly above its long-term average.

I bought palladium early this year, at about $200 (and pestered anyone who would listen to do the same). It was a huge bargain then. It is no longer a bargain, but it is near a longer-term average value, which means that as volatility naturally takes its course, you probably woudn't have too much difficulty selling at a profit.

Here is a graph of the longer term price, showing the historical volatility (which may or may not, of course, be a guide to the future!). In this graph, as in the earlier gold graph, average prices for each year are used, and the last price on the curve is the average for 2009 to date. In addition the rectangle shows the 22 Oct 2009 price. Note that the price has four times been above the 22 Oct price.

I will go into the fundamentals of palladium at some point, but the very short story is:

  • there are large stocks in the hands of investors and the Russian government, which means sentiment and politics are important factors
  • mining output is also variable and contributes to volatility
  • there is a solid case that demand will increase over the long term, mostly because of increasing market share (cheaper than platinum) in catalytic converters