Platinum's Neglected Cousin 

It’s a whitish, ductile metal. It is No. 46 on the Periodic Table of Elements…and it is a “Buy.” I don’t just mean that it is a solid investment opportunity in which you can buy shares. I’m talking about an opportunity so big, you could literally pull a truck up to the front door — but make sure it’s an armored truck, as I’ll explain below — and drive home with the stuff.

The metal’s name is palladium, and it is used mainly in automobile and truck catalytic converters, particularly for low-temperature exhaust that emits from diesel engines. For high-temperature exhaust from gasoline-burners, you need platinum. But for diesel engines, palladium does the job.

As the chart below illustrates, annual auto-catalyst demand is currently soaking up a whopping 81% of the world’s annual mined supply of palladium — up from about 60% just a few years ago. This chart also illustrates that the palladium price trend tracks very closely with the auto-catalyst demand trend. Back in 2000, for example, when auto-catalyst demand was consuming more than 100% of the mined supply (above-ground stockpiles plugged the supply gap), the palladium priced soared to more than $1,000 an ounce!

Palladium Price

Looking ahead, the auto sector is recovering in Europe, North America and across the developing world. Automakers have scheduled their production runs, and what’s the fastest-growing kind of vehicle? Diesel-powered. And that means rising palladium demand. Meanwhile, mine output of palladium is stagnant, while global stocks — primarily from Russia — are as tight as banjo strings.

Let’s cut to the chase. We’ve got a metal play here. So how can you invest in palladium?

The Sprott Physical Platinum and Palladium Trust (NYSE:SPPP). Here are the basics: Recently, Sprott Asset Management LP completed a $280 million initial public offering (IPO) for this new trust. Sprott used the funds to buy refined platinum and palladium. SPPP invests and holds substantially all of its assets in physical platinum and palladium bullion, with a modest management fee (0.5% annually) — collected on a monthly basis — plus any other applicable Canadian or other taxes. The trust does not speculate with regard to short-term changes in platinum and palladium prices. It buys and holds.

The idea is that SPPP offers ownership that is easier and less expensive than if one were to purchase, store and insure physical bullion directly. With SPPP, the metal is fully allocated, meaning that each bar is tracked. There is no “mixing” with other metal assets owned by other entities. Every Sprott bar is a distinct, traceable asset.

Sprott stores the metal in secure, bonded facilities. Platinum bullion is stored at a secure location in Canada. Palladium bullion is fully allocated and stored in secure locations in London and Zurich. All physical metal is subject to a periodic “spot inspection.” The metal is also subject to audit procedures by external auditors at least annually.

This SPPP trading format provides a secure, “exchange-traded” means for investors to hold physical platinum and palladium bullion. The trust units trade on the NYSE “Arca” list. The fund also trades on the Toronto Exchange (PPT:TSX).

As an added benefit, there’s a tax advantage here for non-corporate US investors. If you buy and hold SPPP units for over one year and elect to treat SPPP units as a “Qualified Electing Fund” (QEF) on IRS Form 8621, gains realized on the sale of SPPP units should qualify as long-term capital gains. You’ll pay 20% under the new tax law — but be sure to consult your tax attorney or accountant for specific guidance.

Also, SPPP investors have the right to make physical redemptions of platinum and/or palladium, under circumstances established by the Sprott group. If you own enough of SPPP, you can literally drive an armored truck up to the storage facility, complete the paperwork and drive away with your metal. (Of course, then it’s your problem!)

The bottom line is that Sprott’s new SPPP provides a means of accumulating palladium without having to lift and store all those heavy metal bars. You are just one step away from actual ownership and possession, without the hassle of arranging your own storage and security.

Meanwhile, the coming year looks strong for palladium pricing, such that SPPP offers a healthy upside. Indeed, if you want to know how your palladium investment is doing, just keep an eye on auto production numbers for diesel vehicles.

We could see substantial gains in palladium over the next two years.


Byron King,
for The Daily Reckoning

The Daily Reckoning