The One Commodity Chart Every Investor Needs to See
A little more than 10 years ago, when the market was fixated on high-flying tech stocks like Oracle (Nasdaq: ORCL) and Yahoo (Nasdaq: YHOO), a few savvy commodity investors were making a fortune on a certain industrial metal.
During that time, orders for this metal were so strong, that all the mining production in the world couldn’t keep pace with demand…
To cover the shortfall, buyers had to dip into reserve stockpiles in Russia.
All this drove prices for this metal skyward. Between January 2000 and February 2001, spot market prices surged 157% — from $430 an ounce to $1100 in a matter of months.
Why do I bring this up? Because not much has changed in the past decade, and I’m seeing a similar situation play out in the market that could send this metal — palladium — soaring again.
Here’s the story…
#-ad_banner-#Palladium is an extremely important metal. In fact, I would say it’s indispensable for the global economy.
The metal has a multitude of uses, most notably in the dental, jewelry and electronics fields. But demand from the auto sector is greater than all of those combined.
You see, palladium belongs to the platinum metals group, or PGMs. PGMs are the agent in catalytic converters that turn vehicle exhaust into harmless water vapor. Without these devices, internal combustion engines would spew out tons of noxious pollutants. Despite decades of research, carmakers have never found a viable substitute.
But what really makes palladium unique is that it’s becoming exceedingly rare.
Annual production rates are usually less than one-tenth that of gold. Approximately 90% of the world’s supply is locked up in just two spots (Siberia and South Africa).
Except in rare circumstances, this market has been in a near perpetual state of deficit. For example, palladium mines around the world yielded a total of 6.3 million ounces in 2010. Meanwhile, post-recession demand for the metal rebounded to 7.0 million ounces. In other words, producers couldn’t quite feed the hungry crowd.
To meet global demand, the industry has been tapping a strategic reserve that the Soviet Union spent 50 years accumulating.
Russia decided to open it up for sale in 1990 when the stockpile was estimated to be 27 million ounces. Since then, buyers have withdrawn more than 26 million ounces. The remaining balance is a closely-guarded state secret, but I believe this reservoir is almost exhausted.
Russia’s stockpile has supplied the global market with 1.3 million ounces of palladium annually on average over the past 20 years. But last year, Russia shipped just one-third of that (500,000 ounces of raw ingots and powder) to Zurich, one of Europe’s two main storage hubs.
That’s the lowest in 15 years — corroborating what we’ve been hearing. Barclays believes Russian shipments will plunge to just 150,000 ounces in 2012, and that the tank may be empty by 2014.
If Russia hangs a “sold-out” sign on the door, then get ready for prices to skyrocket. Miners won’t be able to make up the difference.
But that’s not the end of the story… not by a long shot.
On top of falling supplies, global demand is also on the rise.
Forecasting agency IHS Automotive is projecting global auto production to reach 80 million vehicles this year, 85 million next year, and nearly 90 million by 2014. At that point, 250,000 cars and trucks could be hitting the roads every single day.
That’s a lot of catalytic converters — and a lot of palladium.
In total, the world is expected to use more than 8 million ounces of the silvery-white metal in 2012.
Depending on the source, actual mine production will come in somewhere between six million and seven million ounces. So even with added recycling, most analysts are anticipating a deficit of several hundred thousand ounces this year — which explains why prices are forecast to top $850 per ounce by the end of 2012.
Add it all up, and there’s every reason to believe palladium could crest above $1,000 an ounce like it did in 2001. Except this time, the rally could be sustained even longer.
Action to Take –> With the market already in a structural deficit (and with consumption growth expected to double supply growth over the next five years), I think investors would be wise to climb aboard the white metal now… before the the supply get any tighter.
If palladium investing interests you, then make sure to catch next week’s issue of Investor Update. In it, I’ll show you an easy way to gain exposure to the metal, and I’ll profile one of the best pure-play companies in the industry today…
P.S. — If you haven’t heard, starting in 2013, a major event will take place that could devastate U.S. energy supplies. Unless preventive steps are taken, the bulk of America’s electric energy supply will dry up. As the country scrambles to react, one company could shoot up by hundreds of percent. For more information on the coming crisis, make sure to watch this presentation.