For decades, gold bugs have argued the bullish case for their favorite metal. In recent years, they’ve actually been right. The price of gold has climbed steadily for the past nine years, from $277 an ounce in 2001 to a record high (not adjusted for inflation) of $1,213 last December, as investors piled into the yellow metal because of its reputation as a safe haven and as a hedge against a falling dollar.
Even with the run-up in price, it’s not too late to profit from precious metals. But you may want to expand your horizons to metals that are less well known. In particular, two new exchange-traded funds, ETFS Physical Platinum Shares (symbol PPLT) and ETFS Physical Palladium Shares (PALL), let you wager on two precious metals that have a wider array of industrial uses than gold and silver.
To invest in platinum and palladium, you need to have faith in the strength and durability of the economic recovery. Both metals are used in the catalytic converters found in cars, so strong auto sales would be bullish. The pace of car sales in the U.S. is still well below the record set in 2000, but autos are zooming off the lots in China, which recently supplanted the U.S. as the world’s biggest car-buying nation.
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A plus for platinum is a supply shortage stemming from power outages in South Africa, the world’s largest producer of the metal. Jeffrey Christian, managing director of the CPM Group, a commodities-research firm in New York City, says platinum could go as high as $1,800 an ounce, and palladium could hit $525.
Don’t go overboard. Investing in raw materials doesn’t come without risk. In fact, platinum and palladium prices are actually more volatile than gold prices. Precious metals should represent only a small slice of your portfolio -- 5% at most, and probably less for most people.
The current metals mania differs from the one seen in the early 1980s, says Christian. “The move into precious metals this time is more permanent because the economic imbalances are worse than they were back then,” he says. Christian sees gold going to $1,400 an ounce early this year, before sinking back to about $1,100 as investors gain confidence in the sustainability of the economic recovery. The price of silver, which is used in flat-screen TVs and solar panels, could end the year as high as $21 an ounce, he says.
Rather than focus on one metal, consider buying a bit of all four. ETF Securities USA has approached the Securities and Exchange Commission about launching an ETF that holds such a basket. Or spread your risk by buying an ETF that includes not only gold and silver but also other materials, such as oil, corn and soybeans.
For broad exposure, we like PowerShares DB Commodity Index Tracking (DBC). Among regular mutual funds, our favorite is Pimco CommodityRealReturn Strategy D (PCRDX), a member of the Kiplinger 25.
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