When it comes to precious metals, palladium may give investors more bang for their buck than its flashier cousins.
The often-forgotten white metal is expected to outstrip gains of both gold and silver again this year, thanks to concerns over supply disruptions and surging car sales in fast-growing Asian countries.
Palladium is mainly used to make catalytic converters to reduce toxic emissions from gasoline-fuelled cars sold in Asia and North America. Its sister metal, platinum, is similarly used in diesel-powered autos sold mostly in Europe, but that market has been weaker, suppressing platinum's buoyancy.
"Palladium is my top pick among precious metals this year," said Patricia Mohr, a commodity markets specialist at Bank of Nova Scotia.
Last year, the price of palladium surged 103 per cent to $797 (U.S.) an ounce, while platinum rose only 20 per cent. Silver gained 80 per cent, while gold was up 29 per cent.
Palladium, which closed at $817 an ounce on Friday, could reach between $950 and $1,000 this year, and should be "a strong performer over the next five years," Ms. Mohr said. Its previous peak was $1,090, hit in 2001.
One driver is China's vehicle sales, which are expected to rise 15 per cent this year, slowing from a 33-per-cent gain in 2010 because Beijing is restricting vehicle registration to ease traffic congestion, Ms. Mohr said.
"But I expect [sales]to heat up again," she said. Growth will come from China's smaller cities, many of which are home to at least 10 million people, Ms. Mohr said. Because car ownership stands at 42 per 1,000 people in China and 14 per 1,000 in India compared with 782 per 1,000 in the United States, there is room to grow in Asia.
Palladium will rise alongside gold and silver in the next few months because of the political unrest in North Africa and the Middle East, she said. "It's just safe-haven demand by investors."
Strong investment demand from bullion-based exchange-traded funds (ETFs) will boost prices for palladium as well as platinum for the next couple of years, said Rohit Savant, a senior commodity analyst at New York-based CMP Group. "There is also healthy demand from the electronics sector," where palladium is used in semiconductors.
Mr. Savant said the metal is starting to make some headway as a catalyst in diesel-powered vehicles. Traditionally, palladium has been useless for this purpose because of the high sulphur content in diesel, but that is becoming less of a problem as the sulphur has been reduced with the tightening of emission standards, he said.
Russia has historically been the largest producer of palladium and has kept up with demand because of a state-owned stockpile. But its inventories are dwindling and could be depleted in about two years, and "then the market is really going to tighten enormously internationally," Ms. Mohr predicted.
Rising labour and electricity costs in South Africa, the world's second-largest palladium producer and the largest platinum producer, are also sparking concerns about supply. The country could face a major power shortage over the next five years that may trigger rolling blackouts, RBC Dominion Securities analyst Leon Esterhuizen wrote in recent report.
"We would be surprised if the Chinese authorities do not start to stockpile some palladium," Mr. Esterhuizen said. General Motors Corp. negotiated a deal in December with Montana-based Stillwater Mining Co. for a specific amount of the palladium without locking in a price, in order to secure its supply, the analyst noted.
South Africa's recent move to launch a state-owned mining company has also raised concerns about plans to nationalize the industry. "I personally don't think it [nationalization]will happen, but it is all contributing to supply uncertainty," said Haywood Securities analyst Chris Thompson, who is also more bullish on palladium than platinum this year.
"If you want to play this space, you need to look to companies that produce the metals as primary products, and there are not many," he said.
Mr. Thompson has a "buy" rating, with a one-year share-price target of $8.60, on North American Palladium Ltd. , which owns a palladium mine and a gold mine. Palladium production from its Lac des Iles mine in Northern Ontario should reach 171,000 ounces this year, and more than 300,000 by 2015, he said.
North American Palladium and Stillwater Mining , the only U.S. producer of palladium and platinum, offer the best exposure to palladium without having the risk associated with having a large production base in South Africa, according to RBC's Mr. Esterhuizen. He has a one-year target of $30 (U.S.) a share on Stillwater.
How to gain exposure to palladium and platinum through funds
ETFS Physical Palladium ETF holds only palladium bullion, while ETFS Physical Platinum ETF invests only in platinum bullion. Both charge a 0.6-per-cent fee. PALL has climbed 74 per cent over one year, while PPLT has gained 16 per cent.
ETFS Physical Precious Metals Basket ETF holds gold, silver, platinum and palladium bullion in fixed weights. The ETF, which was launched last October, charges a 0.6-per-cent fee.
ETFS Physical White Metal Basket ETF holds silver, platinum and palladium bullion in fixed weights. Because this ETF invests in white precious metals, which have industrial demand, it is correlated with economic growth. Launched in December, this ETF has a fee of 0.6 per cent.
Mackenzie Universal Gold Bullion Class is a gold-focused mutual fund that can also invest a small portion in silver, palladium and platinum bullion. The fund, which charges a 2.19-per-cent fee, gained 19.6 per cent for the year ended Feb. 28.
BMG BullionFund is a mutual fund that invests in gold, silver and platinum bullion. The class A version charges a 2.98-per-cent fee. The fund is up 34.2 per cent for year ended Feb. 28.
Precious Metals Bullion Trust is a Canadian-listed closed-end fund investing equally in gold, silver and platinum bullion. The fund, which hedges its U.S.-dollar gains or losses back into Canadian dollars, charges a fee of 0.9 per cent, and trades at a slight discount to its net asset value.