Palladium Heating Up

Palladium is finally recovering from a very long bear market. Late Thursday afternoon, it was up more than $10 to $304 a troy ounce, the first time the $300 level has been breached since April 2004.

Look at a five-year chart for palladium, and you will want to start a fundraising telethon for shareholders who held while the price fell from more than $1,000 in early 2001 to less than $150 in early 2003. That fall killed stocks like platinum and palladium producer Stillwater Mining (NYSE:SWC), which went from a $40.30 high in January 2001 to a $2.20 low in February 2003. Nothing shows the high risk and volatility of mining stocks better than that.

Palladium is used in the dental, electronics, jewelry, and chemicals industries, but the majority goes to the auto industry, where more than half of what is produced yearly is used for controlling exhaust emissions. But the high cost of platinum, which recently rose to more than $1,000 an ounce, has palladium moving higher. Catalytic converter manufacturers are expected to tweak their platinum-to-palladium mix more in palladium's favor to keep converter prices in check.

Also, two factors added to demand: the Royal Canadian Mint's introduction in 1995 of a 1-troy-ounce palladium coin that targets investors, and strong Chinese jewelry demand.

While there is still a slight surplus of palladium to stop prices from taking off very quickly, the demand for palladium is clearly heating up. This bodes well for producers like Stillwell and North American Palladium (AMEX:PAL): Palladium is their primary source of income -- and prices above $300 an ounce should help them move away from net losses.

Investors might also want to consider Anglo American (NASDAQ:AAUK) and Inco (NYSE:N) as ways to participate in palladium's rebound without the risk of a company that mines this as its primary product. Anglo American is a little more than 70% owner of Anglo Platinum and its joint ventures, the world's largest miner of platinum group metals (which include palladium). Inco produces palladium as a byproduct of nickel production.

Palladium demand is rising. North American Palladium's stock was up almost 6% in late-afternoon trading, after brushing a new 52-week high Thursday morning, reflecting the promise that rising prices may bring.

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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.