Thanks to commodity strength and another bout of volatility in the stock market, precious metals have been seeing smooth trading this year. In fact, most of the precious metals are crushing the broad market and the broad commodities in the year-to-date time frame.
This is especially true as the two increasingly popular choices - Palladium and Platinum – are outperforming this year driven by continued supply disruptions in South Africa, fears of export limitations from Russia and rising global demand. Palladium jumped to a three-year high, climbing 15% this year while platinum gained 7%.
South Africa Worries Heating Up
South Africa is the world's largest platinum and second-largest palladium producer, accounting for 80% and 33% of global supply respectively.
Tensions in South Africa are raising risks with the labor strike, now in its fourth month, recently taking a violent turn. Four platinum miners were killed on Wednesday as striking workers are preventing other mineworkers to return to work, thwarting the company's efforts to end the strike.
The longest and costlier strike ever by about 80,000 workers has halted nearly 40% of global platinum production at the top three producers – Anglo American Platinum (JO:AMSJ), Impala Platinum (JO:IMPJ) and Lonmin (JO:LONJ). Further, the strike has also resulted in a supply crunch for palladium.
Risk in Russia is Growing
Escalating tensions between Russia and the West following the annexation by the former of Ukraine's Crimea peninsula are also threating the global supply. This is because tough sanctions against Russia by the western powers might curtail export of the metals from the country, resulting in lower global supplies.
Demand is on the Rise
The automotive industry, mainly catalytic converters for vehicles, is a big driver of demand in both platinum and palladium markets. A rebound in the auto industry, new vehicle emission standards in Europe and continued growth in Chinese auto sales would continue to boost demand for the white metals.
Further, increasing industrial applications, higher retail investments, and growing consumption of platinum and palladium for jewelry will likely give a nice boost to their demand.
Given growing demand and dwindling supply, platinum and palladium prices are poised to go up further, especially if the current trends persist. As such, investors should definitely tap the bullish fundamentals with the following two ETFs:
ETF Securities Physical Palladium Shares (NYSE:PALL)
The fund seeks to match the spot price of palladium, net of fees and expenses. With AUM of $507.5 million, the ETF owns palladium bullion in plate or ingots kept in Zurich or London under the custody of JPMorgan Chase Bank.
The product has expense ratio of 0.60% and sees moderate volume of more than 75,000 shares a day. PALL is leading the precious metal space, gaining nearly 16% in the year-to-date time frame.
ETFS Physical Platinum Shares (NYSE:PPLT)
This fund tracks the performance of the price of bullion platinum, before Trust expenses. With about $764 million in AUM, this is the largest and the only physically backed platinum product and kept in Zurich or London in plate and ingot form under the custody of JP Morgan Chase Bank.
The product sees light volume of around 40,000 shares a day and charges 60 bps in fees per year from investors. The ETF has added about 8% in the year-to-date period.
Bottom Line
Investors should note that these two products would continue their outperformance given that the prolonged strikes in South Africa and ongoing tensions in Russia are unlikely to be resolved any time soon. These products have a Zacks ETF Rank of 2 or ‘Buy’ rating.