Is Palladium A Better Deal Than Gold, Silver?

Jan. 10, 2020 5:39 AM ETPALL, GLD, SLV, SILJ9 Comments2 Likes
Brad Zigler profile picture
Brad Zigler
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Summary

  • The Aberdeen Standard Physical Palladium Shares ETF (PALL), which tracks the metal's spot price using bullion held in London and Zurich vaults, is up nearly 55 percent.
  • The SPDR Gold Shares ETF (GLD), meantime, gained just 22 percent.
  • The iShares Silver Trust (SLV) has barely picked up 17 percent in the last year.

Palladium has outdone gold and silver, big time.

The feedback on our Jan. 2 piece bout precious metals was predictable. Some folks thought we were somehow impugning gold when we suggested covered call writes on a silver junior miner ETF. Others thought an option position was just too complicated or risky.

Look, we just calls 'em as we sees 'em. Silver simply has had more "oomph" than gold recently. And miners more than metal itself. But, we get it. Lots of investors are chary of taking on more equity risk through mining stocks. Better, they reason, to have outright positions backed by physical metal.

These folk should love palladium, a platinum group metal which, due to its scarcity, has made it the most valuable of the four major precious metals. Palladium is a key component in automotive pollution-control devices.

Over the previous 12 months, palladium's had much more oomphiness than gold or silver. The Aberdeen Standard Physical Palladium Shares ETF (PALL), which tracks the metal's spot price using bullion held in London and Zurich vaults, is up nearly 55 percent. The SPDR Gold Shares ETF (GLD), meantime, gained just 22 percent. And silver? The iShares Silver Trust (SLV) has barely picked up 17 percent in the last year.[1]

Precious Metals ETFs (One-Year Performance)

Past oomphiness is no guarantee of future outperformance, but PALL's just made a breakout move signaling room for yet more upside. More than 23 percent on the upside.

PALL shares aren't cheap. At $199 a copy, it's a good thing investors can buy odd lots. Still, the ETF shares are much cheaper than the metal itself. At last look, an ounce of palladium changed hands at more than $2,060.

Holding an interest in palladium is a volatile undertaking. PALL's standard deviation over the past 12 months is 26 percent, twice the variability of GLD. Palladium's capricious nature caused PALL to suffer a 14.5 percent drawdown between March and May 2019. It took the ETF until September to recover its lost ground. By comparison, GLD's big drawdown measured just 4.1 percent last year.

An investor who's not put off by the white metal's volatility and looks to use PALL as a portfolio replacement for a gold ETF should heed the ETFs' equity correlations. Over the past five years, GLD has been more "yin" to the stock market's "yang" than PALL. GLD earns a -0.19 coefficient while PALL cranks at a 0.35 level. As the S&P goes, so goes palladium. To an extent anyway.

Which brings us, oddly, full circle. Investors who didn't want to put stock (pun intended) into a miners-based strategy but are willing to hold PALL shares aren't really getting away from equity risk. Considering the delta for the silver miner buy-write suggested in the Jan. 2 column, the equity risk differential could be negligible. The percentage gain potential, too, for both strategies is nearly equal.

What's not equal is the relative cost. PALL shares are pricey; shares of the ETFMG Prime Junior Silver Miners ETF (SILJ) not so much. Very not so much, in fact. SILJ can be bought for little more than $11. That's further cheapened by the receipt of call premium.

It's said often that you get what you pay for. Cum hoc, ergo propter hoc I say. A low price doesn't necessarily cause a strategy to be of low quality. Here, paying attention to a strategy's price tag might be the smartest move. One that might even make a gold bug happy.

End Notes

[i] We're only considering open-ended exchange traded funds here. There is a closed-end fund, the Sprott Physical Platinum and Palladium Trust (NYSE: SPPP) that appreciated more than 51 percent in the past 12 months.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Brad Zigler profile picture
1.82K Followers
Brad Zigler's stints as a contributing editor for the Corporate Communications Broadcast Network, the Journal of Indexes, and CRB Trader set the stage for his role as managing editor of Hard Assets Investor and later as alternative investments editor of Wealth Management (formerly Registered Rep.) magazine, the most highly subscribed publication for financial advisors. Brad's feature articles have appeared in Registered Rep./Wealth Management, Mutual Funds, Financial Planning, Financial Advisor, Futures and Ticker magazines, TheStreet.Com and MarketWatch Web sites, and in journals published by Institutional Investor. After heading up marketing, research and education at the Pacific Exchange's (now NYSE Arca's) option marketplace and Barclays Global Investors, Brad became a financial correspondent for the European Press Network, and a Public Broadcasting System/National Public Radio affiliate. He continues his work as a financial research and communications consultant for a number of private and public organizations.
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