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Last week, I told you about a supply shortage in one of the world's most important metals...

For the past several years, demand for this metal has been so high and supplies so thin, the market has had no choice but to tap a strategic Russian stock pile to cover the deficit.

But Russia's reserves are almost gone... and if Russia hangs a "sold-out" sign on the door, then get ready for the price of this metal -- palladium (a member of the platinum metals group or (PGMs)) -- to skyrocket.

Resource shortages like this are exactly the opportunities I look for in my premium newsletter, Scarcity and Real Wealth. With the demand for palladium soaring, and the global supply getting smaller every day, I think palladium is presenting investors with a good buying opportunity.

But investing in palladium can be tricky... it's not as well known as other metals like gold and silver, and it's not nearly as frequently traded.

So how do you invest in it then?

The easiest way is to invest in the metal is through an exchange-traded fund (ETF) like ETFS Physical Palladium Shares (NYSE: PALL). The fund is designed to reflect the performance of the price of physical palladium.

But I prefer to take a different route. I like to invest in the palladium miners -- the guys that actually pull the stuff out of the ground.

Right now, one of my favorite palladium miners is Stillwater Mining (NYSE: SWC). Recently, General Motors (NYSE: GM)  signed an offtake agreement with Stillwater to buy future volumes of palladium without fixed floor or ceiling prices. This contract is akin to a blank check...

Why Stillwater?

For one, the company is the only palladium miner in the United States. In fact, it's among only a small handful of companies digging up palladium in the Western hemisphere.

The company does most of its prospecting in the Beartooth Mountains of southern Montana, specifically the J-M Reef -- home to the planet's richest concentrations of high-grade palladium ore.

Besides its mining operation, the vertically-integrated firm also owns smelting and refining equipment, as well as a profitable recycling business (where PGMs are salvaged from old catalytic converters).

Last year, Stillwater recovered 487,000 ounces of recycled PGMs from spent materials. This operation generated $377 million in revenue for the year, more than double the total from 2010 -- not bad for a secondary business.

Of course, the featured attractions are the firm's two mines, which produced 518,000 ounces of PGMs in 2011 (nearly 10,000 ounces per week). That's about 33,000 more ounces than were extracted in 2010. Better still, realized sales prices for palladium jumped to $739 per ounce from $495 per ounce, while platinum prices climbed to $1,705 per ounce from $1,488 per ounce.

As a result, profits for the year soared 186% to $144 million, or $1.30 per share.

Management is expecting similar output of around 500,000 ounces in 2012. And if things play out as expected, then this production could be sold at even loftier rates later this year...

Furthermore, I think platinum is poised for continued gains. The metal is 30 times rarer than gold and historically fetched a 60% premium to gold during the past decade... but right now that number sits at just 6%. And by all rights, palladium should outpace platinum.

The two metals are often interchangeable -- auto makers can generally use whichever they prefer. So with palladium ($665/oz.) at less than half the cost of platinum ($1,544/oz.), many are opting for the cheaper material.

This means that when platinum or palladium gets too expensive, users begin to shift to the other.

Given continued industry switching and the effect of dwindling Russian stockpiles, I believe prices will converge even further. If so, Stillwater will be a standout performer. Most others in the industry are tilted to platinum, whereas Stillwater's production mix is weighted 75% to palladium.

Of course with investing, nothing is 100% certain. A protracted downturn in palladium prices could wipe out Stillwater's earnings and delay future expansion plans.

Action to Take -- > But given the widening supply-demand imbalance, the value of Stillwater's low-cost, high-grade reserves should appreciate over time. It won't be a smooth ride, but today's investors could double their money over the next five years.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article. Read the original article here.

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