Sold palladium

14 Apr 2010 by Jim Fickett.

Today I sold some palladium. There has been a very strong rally, which was driven at first by the recovery but now probably mostly by speculation. My gain was 142%

In Feb 2009 I noticed the palladium price was quite depressed, probably due to the general pessimism at the time. That was when I started making for myself the graphs of Historical prices of precious metals, adjusted for inflation. I bought an amount equal to about 1% of the portfolio, at an all-in price of $205.58/ounce.

Recently a US-based palladium ETF, PALL, was established, making the market much more accessible to US investors. Speculative demand, as well as the general recovery, have caused an impressive rally:

Today I sold, partly because the current rally was looking a bit frothy, and partly because palladium is at least as much an industrial as a precious metal, and I have little faith that the global recovery is solidly based. My all-in price for the sale was $497.43/ounce, for a gain of 142%.

Two further notes: First, if I ever get interested in the palladium market again, I will probably use the ETF. At the time I bought it was not yet available, and I went with physical metal. But for coins and bars liquidity is low, hassles are considerable, and turnaround costs very high.

The second point worth a comment is that the current palladium market is a great example of a more general principle: when asset prices are going up, great-sounding stories abound, but you had better do your homework to check on them. Many stories are going around right now that palladium is about to be in short supply, as the auto market recovers (the single largest use is in catalytic converters) and the Russians stop selling from their Soviet-era stockpile.

Let's look at just that last point. Goldcore on Seeking Alpha says Russian stockpiles may now be depleted, but gives no source.

Google turns up a widely-cited report from Stillwater Mining Company, a palladium producer, which is full of unsupported assertions. Charts and graphs are attributed to a respectable consultancy, but interpretation is from a company that has, shall we say, a slight conflict of interest. The Stillwater report does state that Russian stockpiles are essentially gone, but the evidence is very thin – some very old guesses of what the stockpiles might have been, based on guesses of what mine production in the Soviet Union might have been, set against estimates of what sales might have been since then. (Commenter Mark Anthony on Seeking Alpha added links to more material which suggests Russian stocks might be running low approximately now, but again there is much guesswork involved.)

Norilsk Nickel, the Russian company that mines essentially all palladium in Russia and a large fraction of world supply, is in a position to know as much or more than anyone else about Russian stockpiles. They have announced a desire to sell their majority stake in Stillwater; hardly a sign that they think a supply squeeze is coming.

Johnson Matthey, the specialty chemicals company, publishes reports and news on precious metals that have a strong reputation for objectivity. They said in a price review in January,

the abundant supply of palladium in Russia and South Africa could mean that palladium fails to continue its rally as the surplus supply keeps prices at current levels or below

The rally did continue; the Johnson Matthey opinion that supply is abundant suggests to me that the rally is mostly speculative.

Since the price is supported by neither fundamentals nor historical norms, I decided it was time to realize profits.