Beyond Gold: New Ways to Invest in Precious Metals

2 new ETFs give investors exposure to platinum and palladium.


Gold. Glenn Beck has sworn by it. So has radio personality Dennis Miller. Even Fred Thompson, in a way that only a U.S. senator turned Law & Order district attorney could, has stepped up to bat for it. And if you're an investor, chances are somebody you know has told you recently to buy it.

[See The Appeal of Gold ETFs.]

Despite what the potency of the modern "gold rush" might suggest, America's favorite precious metal is hardly the only one out there. On Friday, ETF Securities launched two physically backed exchange-traded funds: one for investing in platinum and the other for palladium. The company offers similar products in Europe, but Physical Platinum Shares and Physical Palladium Shares are the first of their kind in the United States.

Both platinum and palladium are rare precious metals. Their many uses range from jewelry to catalytic converters for cars (to make emissions less toxic). And like gold, their prices have been soaring. Here are a few things to know about the two new ETFs:

Physical backing. Up until Friday, U.S. investors looking for exposure to platinum or palladium had to use roundabout methods such as futures contracts. This was less than ideal for a number of reasons, but primarily because these somewhat exotic trading practices leave room for tracking errors. In other words, they don't guarantee that investments will move exactly in step with actual changes in the prices of the metals. With physically backed ETFs, on the other hand, valuations are based on spot prices (the products' current worth on the commodities market) as opposed to estimations of future trading potentials. Another benefit of physically backed investments is that they are tangible: In the case of the two new ETFs, that means shareholders will own physical chunks of platinum or palladium. Each share is equal to one tenth of an ounce of metal. ETF Securities stores its platinum and palladium reserves in London and Zurich. But before you go jetting off to Europe, understand that retail investors can't actually trade in their shares for pieces of metal.

Inflation and beyond. Like gold, platinum and palladium are often used as hedges against inflation. As a result, they have been quite popular over the past year as investors have braced themselves for the worst. But whereas gold is a rather one-dimensional investment (you're probably not going to buy it if you're not concerned about inflation or the weakening dollar), platinum and palladium are a bit more versatile. "They have the precious metals attributes from an investment perspective, but they're also used from an industrial application perspective as well," says Fred Jheon, ETF Securities' head of product development for the United States. "And so if you have a view on the recovery of not only the auto industry but just the economy as a whole, then I think there's going to be a little bit more correlation with these metals than with just a pure precious metals play like gold."

Hoarding. ETF Securities' announcement that it was planning to launch Physical Platinum Shares and Physical Palladium Shares touched off concerns that the new products could destabilize the precious metals market. The main concern has to do with the fact that both platinum and palladium are quite rare: Last year, for example, only 7.2 million ounces of palladium and 6 million ounces of platinum were produced. Compare that with gold, which has a supply of well over 2,000 metric tons per year. So investors could conceivably use these ETFs to hoard platinum and palladium. In other words, the more metal that is stored away in ETF Securities' vaults, the less that is available for its industrial uses, and a gap between supply and demand could emerge.

Timing. There's always a risk inherent in buying "hot" products. Platinum, for example, has in the past year gone from a low of $919 per ounce to its current value of $1,570 per ounce. Palladium has also maintained a strong trajectory en route to its current price of $422 per ounce. Ideally, these funds would have launched earlier, when they could have capitalized on the momentum that both metals enjoyed last year. Still, Jheon is confident that platinum and palladium have plenty of steam left. "If you just look at it from an industrial application perspective, the automotive industry was hit pretty hard in 2008, so I would view 2010 as the beginning to a potential recovery," he says.