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Cars have these things called catalytic converters. 20 years ago, they were made of platinum. But since 1995 auto manufacturers have been shifting to palladium, mostly because it’s cheaper.And with auto sales on the rise, demand for palladium is robust.
On the supply side, there are two countries that supply most of the palladium to the rest of the world: Russia and South Africa. Which means supply disruptions can have a major impact on palladium prices.
According to a report written by Alex Bryan, an ETF specialist at Morningstar, “In combination with supply-side constraints, a rebound in global auto production and the substitution of palladium for platinum in the light diesel market may increase demand and put upward pressure on palladium prices.”
He also wrote that it is unlikely that demand for the metal will fade:
“In the United States, pent-up demand for new vehicles is fueling strong sales growth. Our equity analysts see this growth continuing into 2013. Despite a recent surge in inventory, this should lead to an increase in production, which would likely increase demand for palladium.”
And that supply might falter:
“Russia boasts the richest deposits of palladium in the world. It supplied nearly half the market in 2011. However, according to Johnson Matthey PLC, the quality of available Russian palladium ore is declining, which may increase the cost of production and reduce the amount the country can supply in the future…Growing stocks in Zimbabwe, and a return to normal production conditions in South Africa, may partially offset a potential decline in supply from Russia.”
Right now the only way to get exposure to palladium prices are ETFS Physical Palladium Shares (PALL), which means you’d own actual physical palladium bullion stored in vaults in London and Zurich.