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Rhodium is a metal in the platinum group metals ((NYSEARCA:PGM)) that nobody really knows about in the investor world. It isn't traded online through futures, while gold, silver and platinum are. You can only buy this metal physically through dealers which makes this metal perfectly unmanipulated. So I am very keen on using rhodium prices to find correlations in the macro-economic world as they are a very reliable indicator.

Rhodium is extremely price-inelastic, which means that its price is very dependent on supply and demand. If there is no supply and a lot of demand for rhodium, the price will skyrocket. The rhodium market is very small compared to the gold market and will have high volatility and low liquidity. For example, prices in 2003 were below $US 1000/ounce, but went up to $US 10000/ounce, which is a tenfold increase (Chart 1).

Chart 1: Historical Rhodium Price

Much like platinum, most of the rhodium supply comes from South Africa (around 80%). This supply, though, will not last for very long. Rhodium is one of a few rare commodities (indium, platinum, silver) that are going to be depleted in less than 20 years at normal economic growth. This growth is coming primarily from the automotive industry as it is used as a catalyst. Almost 80% of gross demand for rhodium is used in the automotive industry.

That's why I'm using rhodium to track automotive companies like General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F).

For example, Ford has been slowing down since the end of 2010 (Chart 2), following a drop in rhodium prices which started in the beginning of 2010. This tells me that the stock price correlates very well with rhodium prices (Chart 1). I believe that the rhodium price is a leading indicator for the automotive industry. If automotive companies see demand in the world for their products, they will need more rhodium to deliver on these products. As demand goes up for rhodium (they will need to buy rhodium to build their vehicles), the rhodium price should go up first due to inelastic demand. Afterwards, the stock price of these automotive companies will follow upwards when earnings increase.

Chart 2: Ford Motor Company

Another example is Toyota Motor Corporation (NYSE:TM) (Chart 3). Toyota Motor Corporation went up from 2002 to 2007 while rhodium prices went up simultaneously. Then the stock price slumped till today when rhodium prices went down.

Chart 3: Toyota Motor Corporation (TM)

Today, China, the U.S and Japan are the top 3 car producers in the world. As motor vehicle sales correlate with economic growth, we could see falling rhodium prices as an indicator of slowing economic growth, especially in China and Japan.

As an investor, you could buy rhodium on the physical market (bullion dealers), but I would only do this when the economy starts growing again (which it is not). For the mean time I would stay away from the automotive industry (emphasis on China and Japan) as the rhodium price is still in decline (Chart 1).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Significance Of Rhodium Price For The Automotive Industry