Dull and dusty rhodium has its charms
martin mittelstaedt
From Thursday's Globe and Mail
Published Wednesday, Aug. 03, 2011 5:42PM EDT
Last updated Wednesday, Aug. 17, 2011 8:41AM EDT
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While many investors clamour to buy gold and silver, there is a little-
known precious metal that may deserve a look: rhodium.
Widely used in automobile pollution-control devices, rhodium holds the
distinction of being the rarest and most expensive of the precious metals,
thanks to a minuscule level of production and a sky-high price of $1,915 (U.
S.) an ounce. That’s pretty cheap for rhodium, by the way. Three years ago,
it traded for about $10,000 an ounce.
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Infographic
Rhodium price chart
Right now, rhodium has bullish demand and supply trends, making for an
intriguing investment case. And for the first time, it’s relatively easy to
play the wild swings in the metal.
A new exchange-listed vehicle for rhodium began trading in London in late
May, while some precious metals dealers have recently started to make it as
easy to buy rhodium as gold and silver, its flashier cousins.
But be forewarned: Rhodium is one quirky investment.
There are no rhodium mines, so exposure isn’t possible through a mining
stock. The metal is only extracted as a trace byproduct found in other ores,
such as those containing nickel and platinum, so its output doesn’t change
in response to the price signals driven by demand and supply, explaining
its terrific volatility.
And unlike other precious metals, which are available as coins, jewellery
or utilitarian bars, rhodium is fabricated into a dull, grey metallic powder
sold in sealed bottles best left in storage with metal dealers.
An intact seal shows the rhodium hasn’t been adulterated, but it’s
advisable to not break it for other reasons. It prevents people from
becoming contaminated by the skin- and lung-irritating dust, or having the
valuable material inadvertently blow away. “You don’t take this puppy home
,” says Jon Nadler, a blogger at Kitco.com, a precious metal dealer that
sells rhodium.
Ned Schmidt, editor of the Value View Gold Report, one of the few analysts
who tracks rhodium, recommends precious metal investors consider
diversifying into it, particularly from silver, which he considers
overvalued after its sharp runup this spring. But he cautions that buying
the grey dust probably won’t interest diehard gold bugs preparing for
financial calamity.
“This is not like gold and silver coins. This is investing in a truly rare
metal. This is nothing you’re going ever to take to Wal-Mart and buy food
with when society collapses,” Mr. Schmidt says.
At the heart of the optimistic case for rhodium is its small mine output of
a mere 751,000 ounces last year, according to a recent estimate by metal
dealer Johnson Matthey. Eight times more platinum is produced, while gold
mine output is about 90 times larger.
There isn’t much rhodium available because its concentration in the Earth
’s crust is about one-tenth that of either platinum and palladium. South
Africa is the major producer, making future output vulnerable to the
declining economics of the country’s mining sector.
Demand is running at 873,000 ounces a year, but with rhodium recycled from
old cars, there is currently a modest surplus of the metal. However, that
surplus could soon shrink or be eliminated owing to the rapidly growing auto
fleets in China and India.
Another positive factor is that some of the available rhodium could be
mopped up by the exchange-traded vehicle, known as the DB Physical Rhodium
ETC (exchange-traded commodity), set up by Deutsche Bank.
“We’ve never had in the metal an investment product like this to suck up
that excess,” Mr. Schmidt observes.
When Deutsche Bank issued the securities in late May, rhodium surged from $
1,915 an ounce to $2,395 ounce in a week, but the price has since settled
back. Each share represents ownership of one-tenth of an ounce and currently
trades for about $206.
“DB set up this security to enable investors to take exposure to rhodium
in a simple, transparent and secured (collateralized) manner,” Deutsche
Bank says.
Metal dealers are also making it easier to buy physical rhodium by
narrowing the spread between the price at which they buy and sell the
commodity. Kitco.com, for instance, currently has a $100-per-ounce spread,
or roughly 5 per cent, a level more in line with the amount dealers charge
on gold coins. Previously, the spread – the amount a buyer would need to
make to break even on a purchase – ranged from $250 to $400.
Mr. Schmidt says it will probably take another 18 to 24 months for the
market to become aware of rhodium’s bullish fundamentals. He predicts it
will then pop significantly higher as investors pour into the relatively
thin market. “When these funds come in and start buying something and there
is no supply elasticity, the price can just do crazy things,” he said.
_______________________
The most precious metal
Rhodium isn't as well known as gold or silver, but is the most precious of
the precious metals, trading at a lofty $1,915 (U.S.) an ounce.
While gold is reaching record highs above $1,600 an ounce, rhodium is more
than 80 per cent below its all-time high set in 2008 of around $10,000 an
ounce.
Up until now, it's been difficult to invest in rhodium because it didn't
have an exchange-traded vehicle, the easiest way to play a metal because it
doesn't involve buying the actual commodity.
In May, Deutsche Bank set up the DB Physical Rhodium ETC, (exchange-traded
commodity) which trades in London and represents an ownership of one-10th of
an ounce of the metal for each share. Rhodium is used in car pollution-
control devices, and its fate is tied to the global automotive industry.
Bulls on the metal say surging demand for cars in India and China will drive
up rhodium usage.