LAWRIE WILLIAMS: Palladium no beneficiary of recent gold price rises

At the beginning of the current year, precious metals forecasters were predicting that due to what were seen as extremely positive fundamentals, palladium would outperform its precious metals peers.  In the event, palladium has actually been the worst performing of the complex, down around 25% year to date – and it has even fallen over the past few days when gold has been showing slight signs of strength.  So far this year it has fallen while even the most bearish of the analysts in the beginning-of-the-year LBMA price prediction competition panel was predicting an average price of well over $700 while at the moment it is languishing at around the $570 mark.  While there are four months still to go this year, and a lot can happen in the markets in that kind of time horizon, the chances of reaching even this most pessimistic forecast among the LBMA panellists now look bleak indeed.

In its summary of the results of the forecasts, which were provided by 26 top analysts from a number of countries, the LBMA noted that palladium prices were actually forecast to average $838.40, up 5.3% from where it started the year and 4.4% above its average price in 2014. The most bullish of the analysts (we’ll not name names to save any embarrassment) forecast an average price of $950 and the most bearish with a forecast of $738. The palladium price was then expected to benefit from a continuing supply deficit as well as improving industrial demand and strong car sales in North America and China.

While North American car sales are looking decently strong, growth in Chinese demand appears to have fallen off something of a cliff.  But the seemingly positive prospects at the beginning of the year stimulated demand in palladium ETFs, and the poor performance since has led to subsequent sales thus exacerbating the downturn.

Observers of the palladium market put the very poor performance this year down to two major factors – one of which was wholly predictable in hindsight, and one which was perhaps not so much so.

The predictable factor was the big pick up in palladium production in the first half of the current year from the world’s second largest producer of the metal – South Africa.  2014 production there was decimated by a 5-month strike affecting much of the country’s output.  This year this has returned to normal levels – indeed is running close to a record.

The second major factor has been the huge downturn in China as the Asian dragon reboots it economic focus from an export led manufacturing focus to a domestic consumption one.  In some ways this was predictable too with warnings from some China watchers as long as three years ago that the economic reboot was planned and would be implemented and that the impact could be extremely painful, not only in China itself, but also globally.  And so it has been, although the warnings were totally ignored in the West used to a decade of uninterrupted Chinese growth.

But even so, one suspects the downturn in the palladium price may well have been overdone.  It is still likely to remain in a basic supply deficit situation, but it will require a major change in sentiment, plus a decent recovery in the gold price, to bring it up to anywhere near those LBMA beginning-year predicted levels in the medium to long term.  True palladium is basically an industrial metal with demand dependent very much on the auto-catalyst sector – the prime mover in its price declines this year – but it is also a ‘precious’ metal and the whole precious metals complex, illogical as it may be for those which rely for their demand on the industrial sector, tends to move up and down alongside gold to some extent.  A change in sentiment towards gold, which has been long predicted, but reluctant to arrive, is also overdue in some eyes, although there are others who see it falling back again.  All this makes for something of an uncertain future for the path of the palladium price which at the beginning of the year looked to be a dead cert for strong price rises this year based on assumed strong fundamentals at the time.

 

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02 Sep 2015

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