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Palladium May Gain From Yuan Revaluation

NEW YORK ( TheStreet) -- The move to end the yuan's peg to the dollar will lower the import costs of palladium for China's automobile manufactures. Overall, cheaper costs to manufacture cars and a probable decline in car prices will increase automobile demand. This, in turn, will increase the demand for palladium and the metal's price.

Palladium producers Stillwater Mining (SWC - Get Report), North American Palladium (PAL) "/> -- palladium stock picks -- and Platinum Group Metals (PLG) are poised to benefit from the increase in palladium prices.

China surpassed the U.S. to become the world's largest automobile market in 2009. During the first five months of 2009, production in the domestic auto sector zoomed 56% from a year earlier. Since the auto industry accounts for nearly half of the world's palladium demand, an uptrend in China's automobile production will benefit palladium.

Palladium and platinum are used in catalytic converter applications in automobiles. Palladium has been substituting for platinum as product differentiation is insignificant. However, price spreads between the two metals is quite substantial. Currently, palladium and platinum for spot delivery are trading around $484 an ounce and $1,586 an ounce on the New York Mercantile Exchange.

Palladium deficit is expected to elevate during 2010 because of China's demand, thereby supporting higher palladium prices. Stillwater Mining, North American Palladium and Platinum Group Metals are set to rally from the metal's outlook and may outperform gold and silver stocks even on a risk-adjusted basis for 2010.

In the short term, Stillwater and North American Palladium, with equity betas of 1.90 and 1.67, respectively, may witness a sharp upside in comparison to platinum group metals with an equity beta of 0.99.

Stillwater Mining edged up 2.3% during trading hours Monday. At $13.84, the stock is trading below its 50-day moving average, but above the 200-day moving average.

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