2020’s hottest trade isn’t what you’d guess.
It’s not some high-flying tech stock, or a rebounding biotech, or even gold. It’s rhodium.
The little-known precious metal has surged a jaw-dropping 39% since the beginning of the year on strong industrial demand, particularly from the automotive industry which makes up more than 80% of the global demand for the metal.
Global efforts to clean up gas-guzzling cars have driven rhodium up, pushing it to a value higher than that of gold.
Rhodium—along with other precious metals like palladium and platinum—is used in catalytic converters, part of auto exhaust systems that reduce toxic gas emissions. The metal has been driven higher by rising demand, particularly due to stricter emissions regulations in Europe and plans in China to toughen emissions standards, and limited supply.
“It has very much been a demand-driven story,” said Standard Chartered precious metals analyst Suki Cooper. “The prospect for future supply is a concern. But in the near term, it’s being driven by higher [auto] emissions standards. And given that it’s a small market, we see that tightness materializing in much sharper moves higher.”
The metal’s gain so far in 2020 builds on a strong 2019, when prices rose 151%. But Bank of America agrees with Cooper that there’s upside ahead for the metal as tighter regulations, and rising interest from investors, fuels demand.
“With rhodium supply constrained and the auto industry continuing to focus on tightening emission standards, we see a risk that the market may flip into deficit,” Bank of America analyst Michael Widmer said late last year. “Beyond commercial demand, investor interest in rhodium also remains high, so we believe prices should remain elevated going forward.”
But investors should be cautious as there can be wild price swings in the rhodium market. Analysts at Heraeus noted that between 2003 and 2008, rhodium prices rose 2,195% before rapidly giving back most of that gain as the broader market sold off during the financial crisis.
However, precious metals analyst and head of business development at Mitsubishi Jonathan Butler says that unlike in 2008 when prices fell sharply, strong demand and dwindling supplies should sustain prices at higher levels.
“The story is very much different from 2008,” Butler said. “I don’t think we will [see the] same depth of a selloff previously. I would expect to see a series of pullbacks, but they will be at higher lows. Overall, the uptrend will remain, but there will be dips in the market to give automakers buying opportunities.”
“Everyone needs this metal,” Butler said.