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Palladium vs. Gold: Is Palladium a Better Investment Than Gold? 20 Years of Data Analyzed


 

Summary:

1. Gold and Palladium, historically, have delivered statistically similar monthly returns. However, Gold has superior long-term growth rate (geometric mean).

2. Palladium has a higher long-term variance compared to Gold, and thus is a riskier commodity.

3. Palladium's superior performance since 2016 is due to high demand and limited supply. However, this condition may not last long-term.

4. The two metals don't have correlated returns, thus, Palladium's beta in relation to Gold cannot be established.


 

©Risk Concern. All rights reserved. Report (Commodities)


Can you earn a higher yield by investing or adding Palladium to your portfolio compared to Gold?

This report analyses 20 years of data for definitive answers. The returns, risks, and prospects of the two in question are analyzed in this report.


Gold, of course, is the most widely recognized and accepted unit of account, medium of exchange, and store of value, in the entire world. Touted as the 'flesh of the gods,' interest in it has been elevated since 2019, due to rising concerns of the start of a contractionary phase of the business cycle since 2018, and since 2020, due to unprecedented increase in the money supply by all key central banks through Seigniorage, which is the printing of new money.


See also:

How Much Can Metals, Energy, & Grains Fall In a Market Crash? | Which Is the Best Commodity to Hold?


Concerns are, of course, high regarding the stability of Fiat currencies, especially of the currencies in the SDR (A SDR (special drawing right) is a basket of four leading currencies: Japanese yen (JPY), US dollar (USD), British pound (GBP), and euro (EUR)).


JUMP TO KEY TAKEAWAYS


Which precious metal yields/yielded a higher return, Palladium or Gold?

The yearly appreciation (geometric mean) for Palladium (XPD) for the last 2 decades is 2.5%, this means an average nominal yearly yield for XPDUSD stands at 2.5%; inflation-adjusted yield has been (inflation in assessed period = 2.06%) 0.44%.


The yearly appreciation (geometric mean) for Gold (XAU) for the last 2 decades is 10.1%, this means an average nominal yearly yield for XAUUSD stands at 10.1%; inflation-adjusted yield has been (inflation in assessed period = 2.06%) 8.08%.


Gold vs Palladium price chart, gold and palladium, gold vs palladium price
Comparison Price Chart


Another important issue worth mentioning here is that there isn't a strong relation or correlation between the two precious metals, with a R-squared value of 0.0673:


Palladium Beta, Beta of Palladium in relation to gold, palladium linear regression
Covariance Analysis


We can clearly see, nonetheless, that Gold's YoY yield is substantially higher than that of Palladium (XPD). XPD, On the other hand, has outperformed Gold since 2016.

However, these parameters may be considered overly simplistic; therefore, statistical testing has been employed to test the returns and risk below:

To answer this question with statistical significance, hypothesis testing must be employed. The hypothesis, hence, has been constructed as (pooled variance test):


H0: μd - μ0 = 0 versus Ha: μd - μ0 ≠ 0.

, where

μd – the mean difference between the monthly returns of Palladium (XPD) and Gold (XAU).

μ0 – 0


Two sample t-test (pooled variance), using T distribution (DF=406.0000) (two-tailed) (validation)

1. H0 hypothesis

Since p-value > α, H0 is accepted.

The average of XPD's population is considered to be equal to the average. of the XAU's population.

2. P-value

p-value equals 0.841337, ( p(x≤T) = 0.420669 ). This means that if we would reject H0, the chance of type I error (rejecting a correct H0) would be too high: 0.8413 (84.13%).

The larger the p-value the more it supports H0.

3. The statistics

The test statistic T equals -0.200311, is in the 98% critical value accepted range: [-2.3356 : 2.3356].

x1-x2=-0.0016, is in the 98% accepted range: [-0.01900 : 0.003290].

The statistic S' equals 0.00800

4. Effect size

The observed standardized effect size is small (0.020). That indicates that the magnitude of the difference between the average and average is small.


What does this mean simplistically, is Gold more profitable an investment than Palladium?

Statistically, the returns are the same, and we cannot proclaim that one has statistically higher monthly returns compared to the other. Nonetheless, the statistically insignificant yet persistent, small variations in Golds' favor, have resulted in its long-term geometric mean, or growth rate, being higher than that of Palladium. Still, an investor, in terms of monthly returns, as per the statistical test, should be indifferent when choosing one over the other.


Our viewpoint here is that Gold has somewhat superior returns compared to Palladium. Yet, it is also important to note that Palladium, due to limited supply and high demand, has outperformed it from 2016 onwards.


What about the risk? Is Palladium riskier than Gold?

For definitive answers, F test has been conducted to evaluate the difference in variance between Gold compared to Palladium. The hypothesis is constructed as:


H0: σ2XAU = σ2XPD versus Ha: σ2XAU ≠ σ2XPD,

, where

σ2XAU – the variance of the returns of Gold( XAU); and

σ2XPD – the variance of the returns of Palladium (XPD):


F test for variances, using F distribution (dfnum=200,dfdenom=206) (two-tailed) (validation)

1. H0 hypothesis

Since p-value < α, H0 is rejected.

The sample standard deviation (S) of XPD's population is considered to be not equal to the sample standard deviation (S) of XAU's population.

2. P-value

The p-value equals 0, ( p(x≤F) = 0 ). It means that the chance of type I error (rejecting a correct H0) is small: 0 (0%).

The smaller the p-value the more it supports H1.

3. The statistics

The test statistic F equals 0.02885, which is not in the 98% region of acceptance: [0.7203 : 1.3873].

S1/S2=0.17, is not in the 98% region of acceptance: [0.8487 : 1.1778].

The 98% confidence interval of σ12/σ22 is: [0.0208, 0.04006].

F test for variances, using F distribution (dfnum=200,dfdenom=206) (right-tailed) (validation)

1. H0 hypothesis

Since p-value > α, H0 is accepted.

The sample standard deviation (S) of XPD's population is considered to be less than or equal to the sample standard deviation (S) of XAU's population.

2. P-value

The p-value equals 1, ( p(x≤F) = 0 ). It means that the chance of type I error, rejecting a correct H0, is too high: 1 (100%).

The larger the p-value the more it supports H0.

3. The statistics

The test statistic F equals 0.02885, which is in the 98% region of acceptance: [-∞ : 1.3349].

S1/S2=0.17, is in the 98% region of acceptance: [-∞ : 1.1554].

The 98% confidence interval of σ12/σ22 is: [0.02161, Infinity].


What does this mean, simplistically? Is Palladium a riskier investment than Gold?

This means that the risk of Palladium's monthly returns is higher than Gold's returns; for the past two decades, it has been riskier investment than Gold, and this is backed by statistical evidence. In the future, it would be logical to expect Palladium to remain a riskier investment, compared to Gold. Put succinctly, an investor should know that Palladium is a riskier investment compared to Gold, assessed as per the variance of the last 2 decades. Palladium is not purely a safe haven asset either.


Key takeaways – Putting it all together | Future prospects of Gold and Palladium

Gold is an established 'currency,' and a safe-haven investment instrument. This means Golds' demand rises when there is a decline in the yields of sovereign bonds, especially US bonds, as institutional money has historically shown a preference towards Gold in a low yield environment; Golds' demand also rises as overall financial risk perceptions increase, and institutional money moves into safe-haven assets, when this happens, Gold is on the top of the list.


However, there isn't significant evidence backing the assumption that Golds' price increases due to increased industrial demand or is impacted by increased mining (this condition remains plausible with a significant increase in industrial demand or significant improvement in technology that substantially increases Golds' supply, such as novel extraction techniques making oceanic extraction feasible, or asteroid mining).


Gold should be considered a currency with a 0 real rate, essentially. This means, as per the covered interest parity theory, if the real interest rate in the US, for example, increases, Gold should rise in relation to USD. Due to these properties, we can state, deductively, that Gold is an investment-grade currency, one that is the oldest, most persistent, and most renowned.


With a real yield of 8.08% in the last 2 decades, Gold stands out as a prominent high yielding investment instrument, and this perhaps cannot be said about Palladium:

Presently, there is an alleviated level of interest in Palladium, due to its superior returns, compared to Gold and Silver, since 2016. This may lead some to believe that Palladium is a precious metal that has a recent performance that is superior to Gold; this assumption then erroneously leading them to believe that Palladium is a better investment than Gold, and also a precious metal that may be considered an investment-grade currency. This line of reasoning would, of course, be incorrect.


Palladium's superior performance compared to Gold is due to a limited supply and alleviated level of demand, especially by the Automobile industry, and this is the fundamental reason for its higher price growth rate, compared to Gold, 2016. The reason is not a higher investment or safe-haven asset related demand for Palladium.


Thus, investing in Palladium purely for exposure to a stable, investment-grade instrument that is a safe-haven asset would be a flawed strategy, one that overlooks the fundamentals of price movement, supply, and demand.


But can't Palladium continue to rise higher than Gold?

The simple answer is that yes, it is likely that Palladium will continue to rise at a higher growth rate than Gold, in the short run. However, this is not likely to be the case in the long run. Palladium is highly demaned in the Automobile industry, as it is used in the exhaust system of internal combustion engine cars.


Demand for combustion engine cars is likely to decline, of course, due to the rise of electric cars; therefore, in the next decade, demand for Palladium is likely to decline at the rate of the decline of production of combustion engine cars.


This means that adding Palladium to a long-term portfolio, by omitting Gold is unjustifiable; nonetheless, this does not mean that shot-term trading profits cannot be made by betting on Palladium in the short term. Still, if that is the objective, it is our view that options would be a better option presently, compared to acquiring future contracts.


Finally, it is worth noting that Palladium is a byproduct of Platinum mining, and there are no 'palladium only' mines. Disruption or hurdles in Platinum mining, especially in South Africa, can shock the market and skyrocket prices temporarily.

Data and Computations: