Palladium to rein over silver and gold

Platinum Watch Jewel TrendzPalladium has spiked 25 per cent since the start of 2014, and is currently hovering near a 13-year high. The outstanding performance of platinum has trumped silver and gold. However, the current high price is a matter of concern as it may affect the metal rally. But, a close examination of the palladium market reveals that the metal will continue to outperform.

In August, physically-backed ETP holdings have seen a huge drawdown. At the same time, prices have hit multi-year highs. Market participants have been curious about the development. There is reason to believe that someone is buying up the metal on offer and building stocks. On August 27, NYMEX palladium prices reached a high of $894 an ounce against $880 a month ago. Last year during the same time, prices were ruling at $749. The year-on-year appreciation is as much as 20 per cent.

On September 2, palladium ETP holdings saw a record withdrawal of 120,000 ounces, the largest daily fall since the launch of the first product in April 2007, according to experts. However, despite the draw-down in metal held in trust (which actually adds to the market supply), palladium prices have moved higher. London PM Fix on Friday (August 29) was $898 rising 1.7 per cent over the week. The previous Friday (August 22), it was $883, moving up by 0.6 per cent over the week.

The price trend points to the market perception of strong demand not backed by adequate supplies. Interestingly, palladium has been an outstanding performer this year so far in terms of price strength. Following are the reasons for an uptrend in the precious metal.

Supply constrains

Compared to gold and silver platinum definitely has higher supply constraints. The majority of the metal comes from Russia and South Africa that had been grappling with instability for last few months.  While South Africa’s production has been unreliable for years due to power outages, labour disputes, and the fact that the region’s mines are aging, Russia’s production is also affected due to geopolitical concerns.

Russia had reserved stockpiles of palladium during the Cold War, and has been putting the stockpiles in use whenever the country faced market deficit. Recently, Russia stopped doing this and hence at present there is no transparency on the country’s palladium supply data, leaving analysts to speculate that the country’s supplies have been exhausted.

While the country still holds impressive palladium reserves, its current political situation is cause for concern. It is currently under economic sanctions, and while those sanctions do not directly target palladium they are causing some impact on pure sentiment. There is also the potential for steeper sanctions to directly impact Russia’s palladium sector.

Palladium Report 1 Palladium Report 2

Growing demand

Palladium which acts as both precious and industrial metal is in greater demand due to an improving global economy and consumer’s interest in the metal as an investment. Palladium has varied applications including in auto-catalyst, industrial (electrical, chemical and dental) as also in jewellery. As a precious metal, it is also held for investment purposes. With improving economic growth prospects, demand is poised to expand. The fundamental trends in the market support the current high prices.

While an improving global economy erodes the value of traditional precious metal investments, palladium prices actually benefit from higher industrial demand in times of economic growth. Silver and gold also have industrial demand components, but not to the same degree as palladium.

In addition, palladium is seeing fresh interest from investors, which has resulted in the creation of a few physically backed palladium ETFs. These ETFs remove even more supply from the market, acting as another catalyst for palladium prices.

Multi-year deficit expected

The supply challenges and demand outlook discussed above have put the market in a deficit, and this deficit will linger for at least a few years. Standard Bank’s Walter de Wet expects that palladium will be in a deficit of two million ounces this year, 1.3 million ounces in 2015, and 1.8 million ounces in 2016. Until more supply comes online, prices have every right to continue to ascend given the forecast for a prolonged deficit.

To be sure, world palladium market is in a state of deficit. Primary supplies have remained stuck at around 6.4 million ounces last three years, having fallen from around 7.3 million ounces in 2010 and in 2011. It is normal that with the rise in prices, scrap supplies improve. Scrap sales were about 1.8 million ounces in 2010, but have steadily risen. For the current year, such sales are projected variously between 2 and 2.4 million ounces.

So, in the short-term at least, palladium prices are likely to remain firm so long there is a ready buyer for the metal. It is also possible that the quantum of spare inventory may not be rising. The big question is whether prices will decisively breach $900/oz and when.