I like to consider myself a contrarian investor. Zigging when others are zagging is usually the surest way to find underpriced stocks and avoid overheated ones that are due for a pullback.
But this time, the crowd just might be right.
As it turns out, analysts and investors have been singing the same tune — at least when it comes to the outlook for a certain rare metal.
Let me explain…
Back in January, I made a bullish call on platinum in my Scarcity & Real Wealth advisory and pointed out a few reasons why it was likely to bounce in 2012.
At the time, the metal was trading for $1,360 an ounce — today, it sells for about $1,600 an ounce.
[ad#Google Adsense 336×280-IA]Meanwhile, the ETFS Physical Platinum Fund (NYSE: PPLT) has already climbed about 15% for the year.
So far, so good.
As a close sibling, palladium shares many of the same traits and uses, most notably as a key component in automobile catalytic converters.
The main difference is that palladium has historically been favored in gasoline engines, whereas platinum is more common in diesel. But diesel makers are increasingly turning to palladium because it’s cheaper.
Global carmakers are widely expected to roll out 80 million vehicles this year.
Those cars and trucks will leave the assembly lines with 6.24 million ounces of palladium — 6% more than what was consumed last year and a new record high, according to Barclays Bank.
Where will the metal come from?
Russia’s main mining giant is more concerned with nickel production (which accounts for 90% of sales). And South African producers have been plagued by energy shortages and labor disputes. The country’s output is expected to be the thinnest in years.
This will likely be the sixth consecutive year of falling global mine production.
To cover the shortfall, palladium suppliers have been dipping into secondary, above-ground sources, namely a strategic stockpile in Russia. But this key source is running dry and may almost be depleted.
With more cars on the road and fewer supplies coming out of key mines, market forecasters are bracing for a palladium shortage of 215,000 ounces this year. And thanks to the introduction of commodities-backed exchange-traded funds (ETFs), it’s pretty easy to gauge the investment community’s appetite for specific metals.
Russia shipped just 500,000 ounces of palladium ingots and powder to Switzerland (one of Europe’s two main storage hubs) in 2010, the lowest amount in 15 years. Barclays says Russian shipments will plunge to just 300,000 ounces this year and may be exhausted altogether by 2014.
Right now, people are clearly hungry for palladium.
This deficit is a big reason why ETF investors from New York to Zurich are suddenly hoarding the metal.
There are 58.9 metric tons of palladium stockpiled in ETF bank vaults, according to Bloomberg. This total represents a healthy 14% increase in palladium fund holdings since the start of the year — the strongest quarterly increase since 2010.
Palladium prices on the London Metals Exchange have been essentially flat, but fund assets have been rising sharply, thanks to new inflows from shareholders — cresting at $1.23 billion last week.
It’s no coincidence that 11 top metals analysts are forecasting palladium to surge to $850 an ounce by the end of 2012.
This implies a 33% increase from current levels near $640, which easily bests the price appreciation outlook for silver (13%) and gold (15%).
Action to Take –> In 2001, the last time we saw a major supply shortage, panicked buyers went on a binge that pushed palladium spot prices to a record $1,100 per ounce.
There may not be a repeat of that, but there are sound reasons why palladium remains a good long-term bet. The metal exhibits many of the characteristics that I pound on the table in my Scarcity & Real Wealth advisory — it’s a scarce (and dwindling) resource with growing global demand and real tangible wealth. In a world of crooked politicians, paper money and ballooning government debt, it’s essential that investors own investments exactly like this one.
First Trust Global Platinum (Nasdaq: PLTM) is an ETF that offers undiluted exposure to platinum and palladium producers. The fund enjoyed a nice 8.3% bounce in the first quarter, but I think there are more gains in store for shareholders through the remainder of 2012.
— Nathan Slaughter
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