Advantages and disadvantages of investing in rhodium, a precious metal twice as valuable as gold

With a price increase of more than 30% so far this year, rhodium now costs more than double what gold or palladium cost. Despite this, the precious metal has not attracted much attention from investors.

Rhodium, which is corrosion-resistant and used in vehicle catalytic converters and as an electrical contact material, rose above a 10-year high to hit $3,300 an ounce on Friday, from $2,460 at the end of 2018, according to data from specialty chemicals company Johnson Matthey. This price per ounce compares to $1,312.30 for US gold: GCJ9
and $1,515.50 for US palladium: PAM9
due Friday.

“Rhodium Prices Below $1,000 [an ounce were] far too cheap for such a rare and useful product,” said Hans-Guenter Ritter, Global Head of Trading for Heraeus Precious Metals. Rhodium prices fell below $1,000 as recently as August 2017, according to Johnson Matthey.

“A price between $2,500 and $3,500 [an ounce] is the fair value based on demand, the price of platinum and the rand-dollar exchange rate,” given that mining supply is “very heavily concentrated in South Africa,” Ritter said.

“Unfortunately for the world, there are no… primary deposits of rhodium anywhere in the world.”

— R. Michael Jones, Platinum Group Metals

Automotive catalytic converters, which control exhaust emissions, make up the bulk of rhodium demand. The metal provides a “little chemical key in the catalytic conversion mix to unlock cleaner air coming out of an exhaust pipe,” said R. Michael Jones, managing director of Platinum Group Metals Ltd. PLG,
“Unfortunately for the world, there are no…primary rhodium deposits in the world.”

“Produced as a by-product of nickel and platinum mining, the global supply of rhodium has little capacity to meet global needs with more production,” he said. “Rhodium is only 10% of the balance of metals in the best deposits on earth, so if the price goes from $1,000 to $3,000, nothing happens.” Production cannot simply be increased.

Earlier this month, Fiat Chrysler Automobiles US:FCAU
said it was recalling 862,520 of its vehicles in the United States. Catalytic converters are among the parts that need to be replaced because some of the vehicles did not meet federal emissions standards. This has fueled expectations for rhodium demand, contributing to a 17% price rise since the start of the month. “Demand is going to stay strong,” and if Fiat Chrysler continues to need more, “we’ll see $4,000 worth of rhodium again,” said Peter Thomas, senior vice president at metals broker Zaner Metals. Rhodium last traded at this level in 2008, the same year it peaked at over $10,000 an ounce.

Despite the metal’s rarity, however, it “falls under the radar [of investors] relative to palladium and gold due to its lack of market liquidity and very small market size,” Ritter said. “Very small investments can sometimes result in significant price movements and even if you are able to invest in rhodium, it may not be so easy to find a willing buyer when you want to exit,” notes- he.

The market for the metal is just 1.1 million troy ounces, or about 34 metric tons of annual demand, he said. This is about 10% of the palladium market, about 15% of the platinum market, and less than 1% the size of the gold market.

“Some refiners produce rhodium bars for investors,” Ritter said. “Premiums are high when buying, discounts are high when selling.” Rhodium coins are also produced in the South Pacific island of Tuvalu, he says.

Thomas de Zaner suggests PAMP Suisse rhodium bars from a well-established precious metals dealer. One-ounce bars are currently selling for over $3,200.

There is no futures market for rhodium, but there are a few exchange-traded products, including the Xtrackers Physical Rhodium ETF XFRD,

and AfricaRhodium ETF ETFRHO,

Yet, Ritter warns: “We advise caution before considering rhodium as an investment. This is a small, illiquid and volatile market where price fluctuations can be very strong and it may not be easy to get out of your holdings, so profits can turn into big losses very quickly.

Gerald R. Schneider