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Gold Hits a 23-Year High! It’s Time To Consider Palladium, Again

06/13/2011

In early December gold prices closed at a 23-year high. Currently (August 1, 2007) Engelhard Fabricated gold is at $717.59. Traders and analysts are still largely bullish on gold's outlook and although we are still a long way from January 1980, when gold reached $870.00, it is clearly time to once again consider palladium for your electronics applications.

Let's talk a little history. As most of us recall, the late 70's and early 80's brought astronomical increases in the price of gold. These increases spawned a frantic search for suitable, more economic substitutes for gold in electronic applications. As a result of this search, palladium emerged as the most suitable alternative.

Currently, the fabricated price for palladium is 32% below the fabricated price of gold. In addition, palladium is 40% less dense than gold, which means that it takes 40% less palladium weight to provide a plating thickness equal to that of gold. The lower price of palladium together with its lower density provides for a considerable cost savings over gold.

The advantages of palladium don't end with lower material costs. Today we recognize that palladium provides more that an economical advantage over gold. Palladium's material properties make it superior to hard gold in many electronics applications. The higher hardness of electroplated palladium provides for better wear resistance and the lower porosity of palladium and palladium alloys enhance the corrosion resistance of plated contacts.

Many of us remember that palladium's cost per troy ounce moved above that of gold in the 1990's. The reason for this increase was simple supply and demand. It is important to understand that palladium is primarily an industrial metal. Although palladium is a precious metal and is traded as a commodity, the price of palladium is largely based on economic supply and industrial demand and is not as greatly influenced by investor speculation as is gold. During the 1990's the demand for palladium used in automotive catalytic converters increased from just under 1 million troy ounces per year in 1994 to nearly 6 million troy ounces in 1999. Prior to 2001, 68% of the world palladium supply came from Russia. During this period, when palladium demand was peaking, political factors in Russia related to export legislation began restricting palladium supplies to the world industrial markets.

In 1999, automotive catalytic converters accounted for 62% of the total world demand for palladium and another 25% of world demand came from the manufacture of multi-layer ceramic capacitors. When Russian export problems began driving up the price of palladium the automotive industry reacted by optimizing their catalytic converter designs to reduce the required palladium load. The industry also began stockpiling a strategic reserve of palladium as a hedge against fluctuations in supply. In addition, the recycling of palladium has increased dramatically in recent years. In 2003, over 400,000 troy ounces of the palladium used in automotive manufacturing came from the recycling of used catalytic converters. Manufacturers of multi-layer ceramic capacitors have also begun moving away from palladium and today nearly half of all capacitors are manufactured from nickel. More recently, Russia's export legislation problems seem to have been resolved and supplies of palladium from Russia have been steadily increasing.

As a result of these factors world demand for palladium in 2003 was down 46% from its 1999 peak. In fact, in 2003, palladium supplies exceeded demand by 1.2 million troy ounces.

Today the supply and demand market factors that resulted in the dramatic increase in the price of palladium have been resolved. Analysts are anticipating that supply will continue to exceed demand in the foreseeable future. While automotive catalytic converters still account for two-thirds of world demand, the automotive industry has positioned itself such that they will never again be so susceptible to fluctuations in palladium supply.

Before the price problems arose in the late 1990's, the use of palladium as a replacement for gold in connector and integrated circuit manufacturing was growing at a tremendous rate. Since then, electronics engineers and purchasing agents have largely stayed away from palladium. Not surprisingly, recent increases in gold prices have many companies once again considering palladium's economical and technical advantages over gold. Unfortunately, the electronics industry, for the most part has been slow to react. However, there are a few well-informed engineers and purchasing agents, particularly in the integrated circuit industry, that have taken advantage of market conditions and switched back to palladium.

With gold prices hitting a 23-year high there is no longer any reason to wait.