Out of all the precious metals, palladium is among the more overlooked of the bunch. It is a key component in the construction of automotive exhaust systems and in the creation of electronics, jewelry, and dental products. There is a demand for it, and its placement alongside big names like gold and silver indicates its value.
However, if someone chose to buy palladium online, would that person be in possession of a safe haven asset?
Defining Safe Haven Assets
A ‘safe haven’ is an investment whose value is expected to sustain or increase amid market turbulence. Investors look for safe havens so that they can limit their exposure to losses in case of market downturns. That being said, what assets are deemed safe havens can vary. It ultimately depends on the nature of the down market. So, for an investment to be a safe haven, investors need to perform sufficient due diligence.
The reason certain safe havens acquire value when the market as a whole is declining boils down to one of many basic economic principles: supply and demand. A stock market turning bearish leads to investors rushing to sell shares, thus extracting money from cyclical investments.
Precious metals as safe havens
Out of all the safe-haven instruments on the market, precious metals are among the most popular. Gold and silver, as well as other metals, are some of the oldest forms of currency. For a long time, global economies would peg their currencies to various precious metals to provide their economies with stability.
The golden age of currency has come to an end, but precious metals remain ideal safe-haven assets.
Traditionally speaking, unfavourable economic and market conditions result in precious metals gaining value. However, to invest in them, one does not necessarily have to purchase gold and silver bars. Paper precious metals (ex. precious metal exchange-traded funds [ETFs]) are also available. Moreover, investing in companies that mine precious metals is always an option. Notably, companies with strong fundamentals will benefit from the price surge in the products they create.
Whatever way an investor approaches it, precious metal investments are one of the best methods of realizing gains during a bear market.
The studies show
The best way to assess palladium as a safe haven asset is by reading “Reassessing the Role of Precious Metals as Safe Havens — What Colour Is Your Haven and Why?” by Sile Li and Brian M. Lucey. In this paper, they look into gold, silver, platinum, and palladium performances in the middle of tremendous stock and bond market distress. They conduct this research by analyzing the metals’ safe haven properties.
The demand for gold is controlled by its role as a commodity asset (43% of jewelry consumption) and a monetary asset (12% of official sector holding back in 2012 and 36% of investment holding). Meanwhile, the demand for silver, platinum, and palladium is primarily from their industrial use, which makes up over 50% of the demand.
In 2012, recycled gold accounted for approximately 36.09% of the total supply, mostly deriving from jewelry. Scrap silver is mainly above 20% of the total supply. A key reason for the high amounts of recycled silver is over half of the silver utilized in photography is recycled. Scrap palladium and platinum are both fairly low because of their industrial use and the time required to recycle from industrial use. For example, it takes 7 to 15 years to recycle platinum and palladium from the automotive market.
The volatility of gold only responds to monetary variables like inflation, interest rate, and growth rate in the money supply. On the other hand, platinum and palladium respond to both monetary and financial variables. These typically include S&P 500 index returns. Silver, meanwhile, responds to neither.
Gold has been considered a safe haven asset for a long time. When it comes to the other three precious metals, their safe haven roles have rarely undergone testing until recently. Li and Lucey determine that silver, platinum, and palladium all act as safe havens when gold fails to do so. Furthermore, when they all act as safe havens, these precious metals are occasionally stronger than gold.
The precious metals in bullion coin and bar format are forms of financial insurance. With that in mind, along with the research conducted by Li and Lucey, it is safe to say that palladium qualifies as a safe asset.