THE recent wobble in the financial markets highlights the fragile state of the economic recovery. One minute risky assets looked like they will perform strongly, and the next investors were rushing to safe-havens. What investors look for in this environment is a safe-haven asset with risk-like characteristics.
Platinum and palladium could be just the ticket. Firstly, they tend to perform well in both a risk-seeking and a risk- averse environment. Both metals act like safe-havens and tend to be bought by investors when there is a pullback in risk sentiment. But they are also used by the industrial sector, for example, in catalytic converters for cars, hard drives and for crowns that are used in dentistry.
Due to this, supply factors can also weigh on platinum and palladium prices. Precious metal reserves have been falling in recent years, partly because production and exploration costs have risen rapidly, but also because fears about profitability, especially for palladium, has made investment opportunities less attractive.
A shortage of supply is only problematic if there is enough demand to drive the price of the metal higher. And there are signs that demand for palladium and platinum will increase in the coming years, fuelled by growth in emerging markets. Consumers across Asia now want to own cars; in fact, auto sales in China surged past those in the US last year. And this could be just the tip of the iceberg as the middle classes, especially in China and India, continue to expand, boosting consumption in these countries.
But why should investors trade palladium and platinum instead of the more well-known precious metals like gold or silver? Julius Baer, the Swiss fund manager, recommends the lesser-known metals not only because they are regarded as safe-havens, but, because platinum and palladium have an industrial use, they are more than just “crisis metals”.
Investors might also be wary about entering into a long gold position when the price is currently more than 20 per cent higher than a year ago. In contrast, platinum and palladium prices have both underperformed gold and silver in recent years, with palladium remaining fairly flat.
A long position in the metal can help the risk-reward ratio of a portfolio, according to Julius Baer. It argues that precious metals, including platinum and palladium, have low correlations to other asset classes. However, it recommends a long-term investment because precious metals can be very volatile in the short-term.
But for investors with little trading experience or knowledge of palladium or platinum, then an exchange-traded fund (ETF) is a good way to test the water. An ETF takes away the hassle of buying the physical metal – such as checking its purity and storing it – since you can trade an ETF just like a share. Also, you can buy shares in an ETF in relatively small amounts, which is wise for a novice platinum and palladium trader.
Deborah Fuhr, global head of ETF research for BlackRock, the asset manager, says that investors need to do their research if they are thinking about investing in an ETF.
Investors should find out what their chosen ETF is actually invested in, says Stephan Mueller, executive director of the Julius Baer Precious Metals Funds. Sometimes ETFs don’t hold the physical commodity; instead they own notes or certificates that are the equivalent of a claim on the metal, which is actually owned by a bank or another financial institution. “If you are invested in notes then this means that you have counterparty risk,” says Mueller. Thus, the ETF is not a true reflection of the safe-haven status of platinum and palladium.
Mueller would also avoid investing in ETFs with exposure to the miners of precious metals, since the sector is inherently risky: “Not only do you have geopolitical risk in the areas that resources are located, but you also have political risk and the threat that a government could nationalise your assets.”
For retail investors, it can be worth expanding your investment horizon to include palladium and platinum, along with traditional assets. But make sure you do your homework first.