Palladium – how to invest in the most expensive precious metal?


Precious metals have been very popular among investors for years. It is widely believed that they are a much safer form of capital storage than currencies because they cannot be increased in circulation and have physical uses. Moreover, due to their high volume value, they can be stored privately, which is impossible for raw materials such as oil, natural gas or popular plants.

However, when the name „precious metal” appears, most often everyone thinks of gold or silver, and it turns out that palladium was the most valuable investment asset and the best opportunity to achieve big profits in the current decade . The text will present the most important financial instruments and derivatives that enable investing in this metal and explain its phenomenon.

What is palladium?

Palladium, discovered only in 1803, is a shiny, ductile, malleable silver-gray metal. It does not react with water or air. It dissolves in strong acids and bases. Importantly, it is thirty times less than gold, so its deposits are very limited.

Its unique property is its ability to absorb gases. As a result, it is most often used in the production of car catalysts, in which it allows accelerating chemical reactions, filtering out harmful substances and converting them to safer ones.

Palladium is also useful in electronics, medicine, chemistry and jewelery. In the latter case, it is used to create white gold, it is it that gives this popular alloy its characteristic shade.

Worldwide, only about 210 tons of this raw material are extracted annually. Five countries are responsible for 98% of deliveries: South Africa, Russia, Canada, the USA and Zimbabwe. Its price is determined, as with other precious metals, in US dollars per ounce. Let us now analyze how the price of this metal has behaved in the past.

Historical quotation of palladium

For many years, palladium was by far the least popular precious metal in terms of investment. The situation changed only in the second half of this decade, when a huge speculative demand for this metal appeared. However, this does not change the fact that the prices soared for the first time at the turn of the millennium.

In mid-1999, the cost of an ounce was around $ 350, and then there was a violent Hoss lasting 18 months. In January 2001, the rate reached a historic high of $ 1,079. Over the next two years, however, it recorded a strong decline, down to $ 150, which was the amount you had to pay for an ounce of this metal in April 2003.

Then there was an uptrend, but with a much smaller range, the maximum was $ 575, this happened in February 2008. This resulted in a sharp decline of 10 months, in December of the same year, an ounce of palladium was only $ 163.

It was then that the historic, long-lasting Boom began, a bit reminiscent of its stock market counterpart, recorded at the same time. For its first 10 years, growth was systematic but relatively slow. It was not until September 2018 that the rate broke through and remained above $ 1,000 an ounce that it rose sharply.

The highest historical peak was reached on February 27, 2020, it was as much as $ 2,875. For the next two weeks, even the precious metals market suffered a financial meltdown and the rate fell by $ 1,200, however, it quickly recovered half of this sell-off and now an ounce of palladium is trading at around $ 2,200.

Now let’s move on to how to invest in this raw material.

Palladium Futures

First, a short explanation – futures contracts are a bilateral contract to buy / sell a specific underlying asset, in this case palladium, for a strictly defined price on a given date. They are standardized instruments, and they are traded on individual exchanges, which also means predetermined underlying instruments, execution dates and contract sizes.

As for the second and third points, in the case of the above-described precious metal, they expire quarterly (in March, June, September, December) and are contained in 100 ounces, so a large capital is required. This is because they are traded on a centralized, open market and the broker or brokerage house is only an intermediary.

Of course, we don’t have to hold the contract until it expires. We can sell it at the current market price if there is sufficient liquidity in the market. In the event that there is no investor willing to buy it back, the position is closed at expiry at a predetermined price. The futures market is intended for experienced investors and is speculative in nature. Additionally, it has a leverage of 1:10.

Palladium CFDs

CFDs are the easiest to use and arguably the most popular way to invest in commodities. Their name comes from the English language and is an abbreviation of Contracts for Difference, i.e. contracts for differences. The CFD market is over-the-counter, which means that the transaction is between an investor and a broker and not in the real market.

The CFD follows the movement of the underlying asset, which in this case is palladium. After opening a buy position, when the price of the underlying instrument goes up, we make money on its rise, and the selling side loses, and vice versa. We do not acquire the asset physically, we only speculate about a change in its price in the future. As in the case of futures, on the CFD market we can place long and short orders, and the financial leverage for precious metals in Poland is 1:10.

The advantage of CFDs are the other two issues, i.e. the expiry date and the contract size. The deadline does not apply, so you can close your position at any time as long as the market is open and it is lightning fast as the broker undertakes to pay the difference in any situation after placing the order.

What’s more, in this case, we can adjust the size of the contract ourselves to the capital and risk management strategy , they are not standardized, so you do not need large funds to start investing on them.

Additionally, practically every broker offers CFDs on palladium, so there are no problems with their availability. Therefore, it is probably the easiest, fastest and cheapest form of bullet speculation in terms of commissions and spreads.

Palladium options

Options are an instrument that gives their buyer the right to perform a specific operation. Their characteristic feature is that they can use it, but they do not have to, while the other party to the transaction, i.e. its writer, is already obliged to fulfill the option.

The conditions are determined by the exchange and in the case of palladium they are identical to futures contracts, i.e. they expire every quarter and are concluded for 100 ounces and their strike price is strictly defined. There are two types of options – buy and sell. It should also be added that they also allow the use of financial leverage.

So far this market is very similar to the futures market, what’s the difference? In the case of options, we additionally pay an option premium, which is basically the cost of purchasing this instrument. However, as mentioned above, there is no obligation to do so.

So, if the palladium price goes the other way than expected, we don’t need to activate the security until it expires and we only bear the cost of the premium. Of course, they can be made at any time before that date. So the risk of loss in this case is known at the beginning of the trade and the potential profit is practically unlimited.

ETFs on palladium

There are also palladium ETFs available on the market . Their name is an abbreviation of the English Exchange Traded Fund, it is a cash market instrument, which is an open-ended index fund, listed on stock exchanges around the world, which means that they operate on the same principles as company shares.

The purpose of an ETF is to map the movement of a specific financial instrument. It is a passive fund – the rate of return should be as close as possible to the superior asset, and not exceed it. Their advantage is high fluidity. Disadvantages? In the case of ETFs, we can only earn from increases, and there is no leverage on palladium.

The only ETF linked to palladium and appearing in Europe is ETFS Physical Palladium (PHPD) listed on the London Stock Exchange. The management fee is 0.49% per annum and the spread to the market price of the raw material usually ranges from 2 to 2.5%.

How Best To Invest In Palladium

Investing in palladium, due to the high volatility, the variety of instruments offering to speculate on it and the potential of this market due to the limited resources of the raw material, seems to be a great way to generate large profits. However, in this case, one should also take into account the increased level of risk taken.

Due to the characteristics of this metal and its high costs, CFDs are considered the best form of investing in it. What’s more, they have the lowest fees of all three instruments, the fastest execution, reliable market liquidity, do not require a large deposit to conclude a transaction, making them available to virtually every trader.

People interested in investing capital in this precious metal without the help of securities, can purchase palladium physically in the form of bars or coins, but it is not particularly profitable.

First, in such a situation, a tax of 23% is charged, so the transaction will pay off longer. Secondly, it is difficult to access, and thirdly, selling it physically will be a more difficult task and will take longer than it is for a futures, CFD, ETF or option order.

So, contracts for difference are definitely a good form of investing in palladium, especially beginner traders should focus on them.