With the price of gold falling like the weighty metal that it is, even some hardcore gold bugs are now advising near-term caution, so maybe it is time to look at some alternative commodities exposure.
While the case for and against gold has always been multidimensional, from a fundamental perspective at least, investors might find a viable alternative to the commodity in palladium.
“Right now, the case for palladium is fundamental and we're looking at it as an alternative commodity play at a time when the price of gold is moving for non-fundamental reasons,” said Todd Rosenbluth, a fund analyst at S&P Capital IQ.
Unlike gold, which is considered a hedge, a store of value, a jewelry staple and a commodity, palladium is more simply a commodity that is mostly used in the production of catalytic converters for the auto industry.
And as a commodity, the stars are currently aligned for a legitimate supply-and-demand imbalance move, according to Mr. Rosenbluth.
“The fundamentals support investor interest because of improving demand through the recent strength of the auto industry,” he said. “Couple that with supply chain slowdowns and disruptions from South Africa and Russia, which are the two largest producers of palladium, and there are estimates that demand will exceed supply for the next decade.”
One of the easiest ways to gain exposure to palladium is through ETFS Physical Palladium Shares (PALL), a $600 million exchange-traded fund.
The strategy, which was launched in 2010, is up 3% so far this year but is up 25% over the past 12 months.
By comparison, the $37 billion SPDR Gold Shares ETF (GLD) has declined by 13% since the start of the year and is down 21% over the past 12 months.
“I would be concerned in the short term about gold because it doesn't tend to do well in the summer months, and the technicals don't look good right now,” said Janet Briaud, chief investment officer of Briaud Financial Advisors.
Ms. Briaud, who typically manages client portfolios to have between 5% and 10% allocated to gold, is a prime example of how gold investors often look well beyond the pure fundamental affecting the commodity.
“Right now, it seems like there is a belief that the Fed will do whatever it takes to keep the markets afloat, so some people think there's not as much reason to own gold,” she said. “I still think it makes sense to own gold, and we own it primarily as insurance against something happening that we can't foresee.”
From a fundamental perspective, Mr. Rosenbluth said he still sees a strong case for owning gold. But he also acknowledges the myriad forces at play creating the recent volatility for the precious metal.
“There is still a case for gold on a fundamental basis because it doesn't appear that any of recent volatility is related to fundamental factors,” he added. “But as a commodity play, we're looking at palladium as an alternative that we think is off the radar of most investors.”