Palladium Market Panic Buying - What Comes Next? / Commodities / Palladium

This week, a white metalreached a rare feat. Palladium has traded at a higher cost per ounce than gold.

Last month, the palladium market pushed through allremaining technical barriers by posting a new all-time high. A chronic supplydeficit now threatens to launch palladium prices into a super spike.

Atrue shortage of physical metal may be at hand. The primary source of demand isautomakers who require palladium for catalytic converters. Supply, meanwhile,comes primarily (more than 80%) from just two unreliable countries: Russia andSouth Africa.

On the London BullionMarket Association (LBMA) exchange, the palladium market is showing signs ofextreme stress – even panic.

LBMA lease rates forpalladium, which in recent years hovered barely above zero, have shot up to ashigh as 22%. That means palladium users are willing to pay loan shark ratesjust to be able to get their hands on this scarce commodity.

Could the palladiummarket be foreshadowing future developments in platinum, silver, and perhapseven gold? That question now figures prominently in the minds of metalsinvestors.

Many silver bugs point tomining supply deficits as well as years of artificial price suppression asreasons to expect shortages and buying panics in silver. They may well beright.

However, the metal thattends to follow most closely in palladium’s footsteps is platinum. Both metalsare used in catalytic converters. So when one gets substantially more expensivethan the other, manufacturers have an incentive to switch.

Switching from palladiumto platinum isn’t as simple as it sounds. With some modern high-performancecatalytic converters, only palladium works. It can take up to 18 months forautomakers to re-tool their production lines for a switch.

With platinum currentlyselling at a discount of more than $400/oz. to palladium, the economicincentives to substitute should start driving more demand to platinum. It willtake place gradually – and the effect on price may be not be apparent formonths.

PlatinumMay Be Poised to Follow Palladium

Patient platinuminvestors can look to history for some validation of the theory that platinumfollows in palladium’s footsteps.

The last great shortagefear-induced panic buying spree in palladium occurred in 2000-2001. (It wasonly last month when palladium finally took out its 2001 high.) Palladium’sgreat bull market began quietly in 1997 at about $125/oz. Over the next fouryears, a cumulative 800% gain occurred.

By contrast, from1997-2000, platinum went nowhere. It began trading at a discount to palladiumin 2000.

By the time palladium prices peaked in 2001, platinumwas sporting a $400 discount to its sister metal – the same as today.

What is next for platinumcould be similar to what was next for it back then. By 2002, platinum pricescaught up with palladium’s. Platinum proceeded to embark on an epic bull market– from under $500/oz to over $2,200 when prices peaked in 2008.

Of course, supply anddemand fundamentals are different today. All the bullish news and momentum isin favor of palladium. It could, consequently, continue to outperform in thevery near term.

There is, as yet, nosupply deficit in platinum. But future platinum mining supply is very much indoubt. Market woes and rising political risk in socialist-controlled SouthAfrica are forcing some of the world’s biggest platinum mines to scale backoperations or shut down completely.

At some point, the pricedisparity between the two catalytic metals will simply become too great to besustained. When the palladium:platinum price ratio finally reverses in favor ofplatinum, it will likely do so in a big way and trend in favor of platinum overa period of years.

The other white metal,silver, appears due to revert higher as well.

The silver:gold ratiorecently dropped to a 25-year low. Like gold (and unlike the platinum groupmetals), silver has a long history of being used as money – making itespecially desirable to have on hand in the event of a currency crisis.

Platinum is less commonlyheld by investors than is silver. Platinum bullion is available in the form ofcoins minted by a small number of government mints as well as privately minted bars.

The bottom line forinvestors is that a once in a generation opportunity now exists in the whitemetals. The same panic buying occurring in palladium today could be occurringin platinum and/or silver within the next few years.

Stefan Gleason isPresident of Money Metals Exchange, the national precious metals company named 2015"Dealer of the Year" in the United States by an independent globalratings group. A graduate of the University of Florida, Gleason is a seasonedbusiness leader, investor, political strategist, and grassroots activist.Gleason has frequently appeared on national television networks such as CNN, FoxNews,and CNBC, and his writings have appeared in hundreds of publications such asthe Wall Street Journal, Detroit News, Washington Times, and National Review.

© 2018 Stefan Gleason - All Rights Reserved

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