Shift From Palladium to Gold

By Neland Nobel

There is no doubt that among the precious metals, palladium has been the star performer.  It has largely replaced platinum in a number of industrial uses, particularly automobile emission control devices.  Its price performance the past few years has been outstanding.

The question is: has it become too expensive?  Secondly, is it the metal one would want to hold if we the world tumbles into recession?  Our answer would be yes to the first question, and no to the second.

If we set up a ratio chart, you can see the relative price of palladium to gold over the last 20 years.  As a ratio, if palladium does relatively better, the numbers fall.  If gold does relatively better, the ratio rises.

Gold was expensive relative to palladium in 2008-2009 during the last financial crisis.

Since then, palladium has done somewhat better, pushing its price relative to gold back to levels last seen in 2001.  Gold is now a better value than palladium.

Just looking at the palladium price in isolation should give one pause.  In just the past two years, it has virtually gone parabolic and has tripled in price.

Those are some of the technical reasons for a trade from one metal to the other.

The more fundamental reason is that we are suffering a Black Swan event that has hit a very over leveraged world economy.  The world is perhaps more leveraged with debt today than at any other period in history.  This leaves the entire system vulnerable to recession and the chance of recession or worse developing, is now fairly high.

If recession develops, this will cause a drop in demand for industrial uses of precious metals while increasing the monetary demand for precious metals.

Fewer car purchases in a recession translates to a drop in demand for palladium.

Simultaneously, the demand for gold will rise because it is a central bank reserve, a safe haven, and an asset class without default risk.  It has a long history of being default free money.

Likely as well, government and central bank action will be taken to try to stop the severity of the economic downturn, which translates into currency depreciation.

US budget deficits will soar in a recession as spending for the social safety net will rise, and revenue collected by the government will fall.

Plus, as an added bonus, the next recession will occur just as the biggest part of the Baby Boom will retire, which will drive entitlement spending through the roof.  Get ready for deficits, the size of which, will make the world gasp.  And this is true of all the industrialized democracies from the Eurozone to Japan.

Gold benefits more from these monetary issues than palladium does, which while a valuable industrial metal, does not have the use and history as money.

In short, there are sound technical and fundamental reasons for considering a shift out of palladium and into gold.

Charts courtesy of StockCharts.com. 

Information is derived from sources believed reliable but investment results cannot be guaranteed.

–Neland D. Nobel is a retired money manager and Certified Financial Planner with 45 years’ experience in financial markets. With a Master’s Degree in Economic History he has been a long-time observer of gold and financial markets from both the practical and theoretical perspective.