In my previous post here, I have analyzed the fundamental parameters of palladium -- demand, supply and reserves -- and recommended investing in this important precious metal with a long-term perspective. In this article, I will compare the different ways to invest in palladium:
- Palladium futures contracts
- Palladium ETF
- Shares of palladium companies
Data: TradeStation Group, Inc. Chart: Arie Goren
Data: TradeStation Group, Inc., U.S. Bureau of Labor Statistics Chart: Arie Goren
First, let us compare the historical return of the different investment instruments. The table below presents the historical price appreciation and the Compound Annual Growth Rate (CAGR) between December 30, 1994 and September 10, 2012, for the following investing instruments: palladium continuous leading future contract, palladium continuous futures contract adjusted for rollover of the expiring contract, and the stock of Stillwater Mining Co. (SWC), which also considers the dividend distribution. The Palladium ETF did not yet exist in 1994, so this calculation does not take it into account. The adjusted-for-dividends stock prices were extracted from Yahoo Finance, and the data for the continuous contracts were taken from TradeStation Group, Inc.:
In that period, investing in palladium futures contract has turned out quite profitable, but holding the shares of Stillwater Mining has given a poor return. The appreciation of the unadjusted futures contract was 318.6% or 8.43% annually, but because long term investors in futures contracts should roll over expiring contracts, and due to the contango effect, the return was less: 197%, or 6.34% annually, without taking into account trade commissions (a comprehensive explanation about the influence of contango and backwardation on long-term investment in commodities can be found in my article here).
In order to include the palladium ETF, ETFS Physical Palladium Shares (PALL), which was launched on January 2010, an identical study was performed on a much shorter period, from January 29, 2010 to September 10, 2012. The stock of North American Palladium Ltd. (PAL) was also included in this study, even though it could not be included in the first study, since stock prices from Yahoo Finance for this company are only available since October 2000. The results are shown in the table below.
During that period, the return of the adjusted continuous futures contract was very high: 54.6% or 18.14% annually. But the return of palladium companies was not impressive at all. The return of Stillwater Mining was only 12.4% or 4.58% annually, and the return of North American Palladium was negative: -38.1%. The appreciation of the ETF for physical palladium, PALL, was 57.3% or 18.91% annually, better than the appreciation of the adjusted continuous futures contract.
Investing in the ETF for physical palladium PALL seems to be the best choice, as it has given better return than the adjusted continuous futures contract. Because the fund is investing in physical palladium, there is no concern of loss due to the contango effect.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.