Palladium: Trade of the Decade?

Investors have a love/hate relationship with palladium, and when it's hot, it's very hot, and when it's out of favor, it's really out of favor. That offers great opportunity for those watching the supply and demand of the metal.

At this time it's out of favor (February 2012), which could mean it's a good point to enter. Be sure to check the recent performance of palladium when you read this, as its performance and activity will change over time, and when the price rises, you will probably want to wait until it pulls back to a more favorable entry point.

With some emerging markets continuing to boost their middle class, it offers great opportunity and demand for palladium, especially as it relates to it's primary use: in catalystics of vehicles. One of the primary desires of those entering the middle class in countries outside the West, is to acquire a vehicle.

That guarantees, over time, palladium will continue to be in strong demand; and the supply and demand equation favors higher prices.

When doing research for palladium, it doesn't have to branch out into every single use, as over 50 percent of palladium is used in gas-powered motor vehicles. Other major uses include jewelry, dental and electronics.

Don't be overly concerned about the decline in sales of gas-powered cars and trucks, as it will be many years before that could change, so it's not a factor at all in palladium demand, and won't be for years.

Advertisers and those promoting alternative energy sources like to make it appear that demand is slowing, but the reality is cars and trucks run by gas will be the norm for a long time into the future.

Since motor vehicles are by far the most significant factor in palladium demand, that is what has to be watched closely and understood in regard to supply.

Don't believe the media hype, palladium demand will continue to rise because of the strong sales of gas-powered vehicles, and that is the most important thing to those considering investing in palladium need to take into account.

Just like it's pretty easy and simple to understand investors doing research on palladium primarily have to focus on the auto and truck sector, the same is true in how that is affected by emerging markets.

There one needs to mostly watch two countries, and that is China and India, as they'll have the most dramatic impact on the demand for palladium as it relates to vehicles.

As of this writing in the early part of 2012, only 28 people out of a thousand in China have a car, and in India only 12 people out of a thousand have a car. That is a lot of people without cars who will want them over the next decade, as well as in the short term.

If the United States is any indicator of the potential, 451 of 1,000 people in the country have a car. Even if a quarter of that number acquire cars in China and India, that's a major boost in palladium demand.

Now as to what suppliers must be followed to get accurate data for the supply factor of palladium, that's also easy: it's Russia and South Africa.

Russia accounts for 44 percent of palladium supply in the world, and South Africa is right behind with 40 percent.

The nearest palladium suppliers behind Russia and South Africa are Canada, at 6 percent, and the United States at 5 percent. After that there is little relevancy to palladium suppliers.

Palladium has a wide variety of uses, and if you want or need to get a handle on them, they include jewelry, coins, medical, dental, hydrogen purification water treatment, polyester, making watches, oil refining, fuel cells and chemical electronics, among many others.

Of these, outside of catalytics, electronic and dental are two of the major demand sources for palladium. Because of market changes, this is something that would need to be checked upon periodically.

To me it's somewhat a waste of time to check the numerous smaller uses of palladium, as they're not going to have that much impact on the supply factor, and consequently the price movements of the metal.

If you look over the has 7 years or so, when palladium has been out of favor, each time it has rebounded to give investors solid returns.

Right now that is again the case, as very few investors are looking at palladium in a positive way, which is a solid case for seriously taking it into consideration before it begins a significant upward climb in price again.

We know there will be shortage of demand for palladium for years to come, so that means we must look at the supply to see what the future holds for the metal as an investment.

Recently Barclays Capital said it estimates palladium supply will fall short by about 275,000 ounces. That means enormous potential for palladium prices to jump.

Again, ignore the hoopla about electric cars, or something else, cutting into palladium supply, it's not even a factor to be taken into account now, other than in isolated parts of the world. In the future that could be a palladium supply factor, but not now.

So even if demand from Europe decreases, which some expect, China and India will easily compensate for that, supporting the price increase of palladium over time.

No one, of course, can predict price movements of any potential investment, but if the shortfall in supply is close to what Barclays Capital said, in 2012 that price of palladium could soar, possibly doubling, according to some industry watchers.

Over time, there can be no doubt the price of palladium will soar, possibly making it one of the top performers over the next ten years.

This of course assumes somewhat of a global economic recovery, or at least it not getting much worse than it is.

There are many ways someone can invest in palladium, but two ways are probably have the most potential, and are simple to understand. They are also mostly pure plays, or close to pure plays on the price movement of palladium.

Those mining palladium aren't of much interest to me, as it could be a small byproduct of other metals, and also includes the many unpredictable factors related to any business, especially the difficult mining sector.

With that in mind, physical palladium bullion is very desirable, as is the Physical Palladium Shares Fund (PALL).

The Physical Palladium Shares Fund is completely backed by physical palladium, not by contracts. As long as that's the case, all that must be followed is the supply and demand factor for palladium.

Palladium is fairly easy to follow and keep on top of because of the several factors mentioned above.

Look to demand, which is mostly in the automobile industry, and secondarily dental and electronics.

Then look at the two major emerging markets: China and India, concerning the health of their economies and the growth of the middle classes at each.

Finally, follow palladium production in Russia and South Africa to measure how that will potentially affect the price movement of the metal.

From there, just look at a good entry point based upon the recent price movement.

All of these factors will be what should be considered when considering investing in palladium any time in the future, not just for today.

With the historical ups and downs of palladium prices, if you gain a good entry point, there is a lot of money to be made.