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GPF Physical Palladium ETC

GPF Physical Palladium ETC

One of the lowest priced physically backed Palladium ETCs on the market today.

  • Total Expense Ratio of 0.2%

  • Physically backed with allocated palladium in vaults

  • Ownership tracked with Distributed Ledger Technology

Investment Case for Palladium

Applications

Data from Johnson Matthey suggests that in 2019, 84.2% of palladium demand was realised in its use as an autocatalyst, predominantly in gasoline exhaust systems. Indeed, autocatalysts have been the dominant use of palladium for many years, driven by increasingly stringent emissions legislation, which have required greater and greater palladium loadings. Palladium’s catalytic properties are also largely responsible for its use in the chemical industry (4.8%). Palladium is used in the electrical industry (6.4%) in components such as lead frames, connectors and printed circuit boards and finds niche application in dentistry (2.7%)- especially in Japan - and jewellery (1.2%). 

Palladium is currently also a niche investment product through a range of investment vehicles including palladium bars and coins and physically-backed Exchange Traded Funds (ETFs). Going forward, palladium’s ability to store and catalyse hydrogen is likely to give it a role in the developing global hydrogen economy.

The Investment that Glitters

Like other precious metals, palladium has a number of attractive qualities as an investment, including:

  • Provides diversification

  • Market is currently in deficit

  • Is a play on tighter automobile emission regulations

Like most precious metals, palladium has historically exhibited low correlation to the performance of equity and debt markets, along with gold and silver. Over the last 20 years, the correlation of spot palladium versus equity and debt markets is only 0.3 and 0.1 respectively 1, whilst the correlation to gold and silver is a little higher at 0.3 and 0.4 respectively. With such a low correlation to equity and debt markets, even small allocations to palladium provides meaningful improvements in the efficiency and risk characteristics of a 60/40 portfolio.

Many investors don’t like metals such as palladium as an investment as it pays no income stream whilst incurring storage costs. However, today we live in a world where cash also pays little to no interest and government bond yields are low-to-negatively-yielding, making the argument against holding palladium a lot less relevant. It is also worth noting that according to the IMF 2, pandemics typically depress real interest rates over multiple decades, again implying a favourable environment for investing in palladium.

Market in deficit

The palladium market has pretty much been in deficit since 2009, and whilst the deficit is expected to narrow this year due to Coronavirus-induced demand destruction, supply reliability is still an open question. Indeed, South Africa, one of the largest producers of palladium, continues to struggle to operate its mines due to Covid-19-induced lockdowns, which come hot on the heels of devastating closures due to power shortages earlier in the year.

Tighter Emissions Regulations

 A number of environmental trends have driven the price of palladium over the last few years and are expected to continue influencing the demand for palladium. At the forefront of these trends are stricter emissions regulations in Europe and tighter environmental standards for the Chinese auto market; the EU has a binding target of cutting emissions by approximately 40% by 2030, and China is aiming to reduce emissions by approximately 28% over the same period. These environmental forces have and continue to drive:

  • increased demand for gasoline-powered cars at the expense of diesel-powered cars

  • increased demand for hybrid cars

  • increased demand for electric powered cars

As palladium is the core catalyst used in the catalytic converters of gasoline-powered vehicles, the shift to gasoline in the wake of the diesel emissions scandal of late 2015 has been a strong driver of performance. The growth of hybrid vehicles has also been an important driver of the palladium market given that these vehicles typically require greater quantities of metal 3. The global Hybrid Vehicle Market is also anticipated to grow 10% per year over the next 4 years 4, which should continue to support the palladium market.

Price History

Palladium’s price has increased ~3x over the last 20 years, which is comparable to the S&P 500’s gain of approximately 2.5x during the same period. However, it is worth noting that pretty much all of palladium’s performance is concentrated in the last 4-5 years, which coincides with the diesel emissions scandal and the subsequent regulatory response. Owing to a number of reasons, palladium has not been as popular a precious metal investment as gold and silver and is a relative latecomer to the field of investment assets. That being said, with greater access and exciting prospects ahead, investor behaviour may start to change going forward and result in palladium behaving like other precious metals in the face of unparalleled monetary stimulus. 

Properties

Palladium is a chemical element with the symbol Pd and the atomic number 46. It is a rare, dense and lustrous, silvery-white metal and it is, together with platinum, iridium, osmium, rhodium, ruthenium, considered one of the platinum group metals (PGMs). PGMs are all highly resistant to wear and tarnish and are generally resistant to chemical attack. They are thus considered ‘noble’ metals. They also possess excellent high-temperature characteristics, high mechanical strength, good ductility and have stable electrical properties. PGMs additionally possess catalytic properties (i.e. they can accelerate certain chemical reactions). Palladium is remarkable in being able to absorb up to 900x its own volume of hydrogen.

Occurrence

Palladium is approximately thirty times rarer than gold and is thus considered a very ‘precious’ metal, Small amounts of palladium can be found as a free metal alloyed with gold and other PGMs and in the rare minerals cooperite, kotulskite and polarite

According to Johnson Matthey, some 214.4 tonnes of palladium was mined in 2019. Production is quite concentrated geographically led by Russia (42.3%) and South Africa (37.1%), with further contributions from the US and Canada (13.5%) and Zimbabwe (5.4%). Leading platinum mining companies include Norilsk Nickel, Sibanye-Stillwater, Anglo American Platinum, Impala Platinum, Vale, Northam Palladium, ARM Platinum and Glencore.

History

It is likely that palladium was first discovered as far back as the early 1700s by gold miners in Brazil, who referred to the metal as ouro podre (‘worthless gold’). Nevertheless, it was not until July 1802 that the metal was isolated and formally identified as a new element by the English chemist William Hyde Wollaston, while experimenting on South American samples of platinum. Wollaston named his discovery ‘palladium’ after the recently-discovered asteroid, Pallas. Unfortunately, the extreme rarity of palladium, and a lack of practical applications, meant that the metal largely remained a scientific curiosity until the 20th Century. 

Footnotes

1 - MSCI AC Equity and Global Aggregate

2 - “The Long Economic Hangover of Pandemics”, June 2020, Oscar Jorda, Sanjay Singh, Alan Taylor

3 - “Clean-car push puts palladium in the fast lane”, Henry Sanderson and Neil Hume, January 9 2020, FT

4 - “Hybrid Vehicle Market – Analysis of Growth, Trends, and Forecast (2020-2025)

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