PALL: Good in Small Doses

NEW YORK (TheStreet) -- Gold's laggard performance has been one of the more interesting stories to watch in 2012. After last year's breakout performance, easing macroeconomic concerns and coyness on the part of the Federal Reserve regarding new rounds of quantitative easing have helped to knock the highly sought-after yellow metal from its upward path.

For evidence of this disappointing showing, investors need only compare the performance of a bullion-backed gold fund like the iShares Gold Trust ( IAU) to that of a product linked to a fellow member of the precious metals arena, like silver or platinum. Since the start of the year, IAU has risen approximately 5%. The iShares Silver Trust ( SLV) and the ETFS Physical Platinum Shares ( PPLT), meanwhile, have enjoyed gains of more than double this magnitude.

Gold will be interesting to watch in the coming weeks and months as the threat of global fears persist and investors look for stirrings of life, but it is not the only precious metal-related topic to keep an eye on. Palladium may also find itself in the spotlight soon.

Based on the standout performances seen from SLV and PPLT, it is clear that the opening months of 2012 have been kind to industry-linked precious metals. Some, however, have not been so lucky. Palladium, for example, has been a notable laggard, underperforming not only silver and platinum, but also gold. It remains in positive territory, but since ringing in the new year, the ETFS Physical Palladium Shares ( PALL) have risen a paltry 2%.

Palladium's subpar performance in 2012 may be alarming for aggressive investors who, in the past, have turned to this inherently volatile metal for magnified gains during periods of market optimism. These individuals, however, should not give up on either the commodity or funds like PALL. Looking ahead, fundamentals indicate that palladium's losing streak may soon end and prices could be in store for an impressive turnaround in the very near future.

This week, The Wall Street Journal notes that both the supply and demand prospects for palladium are improving. In regards to the former, the report points to diminishing stockpiles in Russia. Meanwhile, continued consumer desire for automobiles in the United States and China will help to keep demand piqued.

China's efforts to reduce emissions helps to further sweeten the metal's outlook. Palladium is used extensively in the car manufacturing industry as a key element in the production of catalytic converters.

The outlook for palladium is improving and, in the event that the bulls can remain in control, it could very well end up being one of the top precious metals to watch in the months ahead. Nevertheless, investors should avoid becoming overzealous with products like PALL.

As I mentioned above, palladium is attractive during improving market conditions, but it tends to be susceptible to more-pronounced fluctuations over time. Those who dive headfirst into a bullion-backed product like PALL may leave themselves vulnerable to unwanted risks.

Rather than a core portfolio holding, a fund like PALL is best suited as a small tactical position that allows an investor to bet on short-term bursts of strength. It is crucial to avoid falling in love with palladium; doing so may result in unnecessary headaches.

At the time of publication, Dion Money Management was long IAU.

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