Palladium Surges above $2,400. Is It Sustainable? / Commodities / Palladium

A new day, a new record in palladium! Is there any stopping it fromreaching another high? What’s next in store for the white metal?

If you thought gold had a goodyear, you were wrong. OK, maybe not wrong, but palladium enjoyed larger gains. Just look at the chart below, whichshows the price of palladium. As you can see on the chart below, this metalgained almost 50 percent in 2019, rising from $1,270 to $1,900!

And if you thought gold started2020 well, you were also wrong. OK, maybe not wrong, but palladium was the real star (although not as great a star as rhodiumwhich has gone really supersonic recently). Let’s look at the chartbelow once again – the white metal skyrocketed from $1,900 to almost $2,500 inJanuary! 

Chart 1: Palladium prices (London Fix) from January 2019 to January 2020.

           
Actually, palladium has reached a record high, as the chart below shows.Compared with April 1990, when our data series starts, the price of palladium increased almost twentyfold, from around $130 to almost$,2,500. It means that palladium is currently more expensive than gold or platinum!

Chart 2: Palladium prices (London Fix) from April 1990 2019 to January2020.

Surprised? You shouldn’t be! After all, we wrote as early as in the July 2017 edition of the Market Overview that

the price ofpalladium should be supported in the near future. We knowthat the above-ground stocks of palladium are relatively plentiful (and may begreater than the market expects), but market deficits at such heights cannotlast indefinitely – and when the market eventually tightens, prices will needto rise.

And in March2019, we again commented on palladium, writing that it had better prospectsthan platinum:

the underlyingstructural deficit grew last year and, what is more important, is expected to widen in 2019, whichwill not be without significance for the price of palladium (…)
And giventhat the latter metal [palladium] has better fundamentals (platinum market is instructural surplus, while palladium market is indeficit), it still seems to be a betterinvestment choice. Although it is true that the automotive demand forplatinum should stabilize in the near future, and the rising price discrepancyshould make platinum more attractive as catalyst, the autocatalyst producerssay that they are not seeing broad-based substitution from palladium toplatinum. Hence, the outlook forplatinum improved, but the path for the palladium is still better.
 
It turnedout that we were right again. As we explained in the past, the underlying causeof the spectacular rise in the price of palladium boils down to the fact that demand has been greatly outpacing supply.And why have we seen structural deficits? The first reason is the rise in the automotive demand forpalladium due to the tighteremission legislation and stricter vehicle testing regimes. The key here is thatpalladium – in contrast to platinum used mainly in diesel engines which are outof favor – is used predominantly in gasoline vehicles (and in hybrid electricvehicles, which tend to be partly gasoline-powered). Second, South Africa’s output of palladium hasrecently decreased due to power outages at local mines and tense politicalsituation in this major producer of palladium.

Implications for the Future

Where is the palladium market heading? Well, given that it’s likely toremain in structural deficit, price may go further north. However, the pricechart of palladium looksparabolic, so – if history of parabolic price movements teaches us anything – it appears unsustainable. So, thecorrection is likely – actually, the price of palladium has already declined to$2,265 and the decline won’t end at this level.

Moregenerally, platinum might now the betterchoice than palladium at current prices. This is because the big hit fromthe Volkswagen diesel scandal has been already absorbed in the platinum prices.And with palladium trading twice as more than platinum, the substitution shouldkick in, supporting platinum relative to palladium.

Thank you.

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Arkadiusz Sieron

Sunshine Profits‘ MarketOverview Editor

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