LAWRIE WILLIAMS: Has palladium had its day in the sun?

The big shake-out in the latest precious metals fallout is that the palladium price has dived and is now back below the gold price – again.  We did predict here earlier in the year in our projections for precious metals prices for the year ahead that gold would retake the mantle of being the top priced major precious metal during the year, and palladium’s huge volatility has seen that come about with a $100 plus price fall at one time yesterday.  As I write the palladium price has come off even further and is sitting some $60 below the per ounce gold price.

Yesterday’s huge palladium price fall was put down by some analysts to technical selling when the metal breached what had been seen as a key resistance level on the downside, triggering HFT computer-generated sales in what is a relatively small market in monetary terms .  This was exacerbated in comparison with the gold price which was seeing a strong concurrent rise following President Trump’s announcement on additional trade tariffs on Chinese imports – seen as exacerbating the ‘trade war’ between the world’s two biggest economies.  One doubts that today’s formal end to the Intermediate Nuclear Forces Treaty - effectively between the U.S. and Russia - will be helping either.  The world seems altogether a more dangerous place this morning perhaps boosting safe haven investment in gold!

Palladium’s demand is hugely dependent as the key catalytic element for exhaust emission control in the gasoline (petrol) fuelled internal combustion engine and thus on the market for the automobile sector which seems to be declining globally at the moment.  The rise had been in part due to diesel driven vehicles (where platinum is the favoured catalytic element) falling out of favour for atmospheric pollution reasons.  The unending rise in demand for non-polluting electric-driven vehicles will be contributing here too, although they are not yet selling in sufficient numbers to make a big dent in automobile sales patterns, although their day will undoubtedly come – but perhaps not for a few more years yet.

The automobile (small car) market is going through a tough stage anyway with downturns in numbers of new vehicles being bought in virtually all major markets.  China, in particular – currently seen as the world’s largest personal automobile market – is reportedly seeing a big drop in sales for internal combustion engine driven automobiles, and is probably also leading the world in the uptake of electric-driven vehicles.  All this is not going unnoticed in the global market for palladium.

On the other hand, palladium has been in a significant supply deficit position for several years now, the belated realisation of which appears to have been a major contributor to recent surges in the metal price.  While the excess of demand has largely been filled by the running down of above-ground stocks, these are not unlimited and the big question is, therefore, whether these stocks plus increases in new mined supply, are capable of fully meeting the existing market for palladium.  If they are we could see further declines in the metal price.

Precious Metals consultancy, Metals Focus, in a recent analysis on palladium concluded, however, that a continuing supply deficit would be price supportive and that the pgm would likely return to a price level of around $1,600 an ounce but, as witness the substantial price differential between bid and ask prices for the metal, there is considerable scope for volatility and, in our view the price could yet slide further in the weeks or months ahead.  Historically palladium’s sister metal, platinum, which arguably has a broader range of industrial usages, and is more popular in the jewellery sector, has commanded the higher price level among the two pgms.  Platinum is a more common metal in the earth’s crust, but palladium’s comparative rarity is no guarantee of superior pricing – the supply/demand balance is the key here.  The platinum price is currently languishing some $550 or more below that of palladium – largely because of a current supply surplus (diminishing) and the decline in demand for diesel internal combustion engine exhaust catalysts – but we would suggest the two might fall more into line with each other over the next year – either through the platinum price rising, or palladium falling further, or a combination of the two given the broader market at present for the former.

Ed Steer, who publishes a daily precious metals newsletter (https://edsteergoldsilver.com/), would disagree with my price suggestions for palladium and reckons that were it not for what he sees as a rigged futures market in the metal, the supply deficits, and comparative rarity, would see the price rising through the roof.  Be that as it may we almost certainly live in an era of manipulated markets by the financial powers that be and even government agencies.  It’s a fact of financial life and perhaps all we can do is try and second guess where the big money is looking to take them – until of course the riggers are overtaken by events beyond their control!  Perhaps I’m getting too cynical in my old age!

However, I stand by my opinions here and feel that the palladium price remains vulnerable, but is volatile enough to still see sharp ups and downs in the months ahead.  However, long term it will likely end up priced lower than gold – and even perhaps lower than platinum.  It’s only a matter of time.  We shall see.

02 Aug 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com