Palladium, More Precious Than Silver, Platinum, and Gold

On March 5, 2018, S&P Dow Jones Indices launched the S&P GSCI Precious Metals, Platinum & Palladium Equal Weight to provide market participants with a reliable and publicly available benchmark for investment performance in the gold, palladium, platinum, and silver commodity markets. The index is equally weighted on a quarterly basis.

What is the added value, if any, of utilizing equal weighting and adding palladium and platinum to the S&P GSCI Precious Metals, which includes only gold and silver with a weight ratio of approximately 9:1? Exhibit 1 depicts the performance of the two indices.

Looking at performance over a 10-year period, it appears that adding palladium and platinum to gold and silver, with an equal weighting improved the performance over the shorter horizon, but how do the indices fair when compared since their base values on Jan. 16, 1995?

The S&P GSCI Precious Metals Index gained over 250% since its base date, compared with the S&P GSCI Precious Metals, Platinum & Palladium Equal Weight, which gained almost 600%. The appreciation was mostly driven by palladium, which increased by over 1,000% since 1995.

Palladium was also the best-performing single commodity for the other annualized time frames, and its stellar performance compensated for its higher annualized risk levels, which resulted in better risk-adjusted returns (see Exhibit 4).

Gold, the second-best-performing precious metal and generally considered a safe haven asset during turbulent market conditions, tends to lose its attractiveness when market participants can obtain better returns elsewhere. Palladium, a byproduct of platinum and nickel, is similar in its status because of its use in precious jewelry and its sensitivity to changes in the U.S. dollar, as it is traded in dollars and becomes expensive when the dollar value increases compared with other currencies. However, palladium also has an industrial application, as it is used in catalytic converters in cars and trucks to reduce pollution, as well as capacitors in consumer electronic equipment. In addition, palladium has been in a deficit since 2012, when it was plagued by challenges in the mining sector and mine closures in Zimbabwe and South Africa, the third- and fifth-largest platinum-producing countries.

Finally, the low correlation in performance of platinum and palladium compared with the traditional precious metals may have a diversification benefit. For comparison, gold and silver have a correlation of 0.72, while gold’s correlation with palladium and platinum is 0.25 and 0.57, respectively.

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