Palladium Hits Record High; Could See Further Upside if Dollar Weakens

You probably weren’t alive when the automobile surpassed the horse and buggy as the main means of transportation, you may not remember when the percentage of homes using cell phones surpassed the number using landlines. However, you should know when palladium prices traded higher than gold prices for the first time in 15 years because that was on Tuesday.

Palladium prices surged to a record on Tuesday with the move fueled by a sustained supply deficit and increased speculative interest for the autocatalyst industrial metal.

According to analysts, higher prices are being driven by the impact of a tight fundamental market, flat supplies, rising demand and most importantly by huge speculative interest.

Demand is being driven by increased industrial uses. Furthermore, speculators who bet against the rally are covering their positions, getting chased out by aggressive traders willing to buy strength. Additionally, the lease market is tightening and palladium forward contracts are in backwardation. This is a market condition wherein the price of a commodities’ forward or futures contract is trading below the expected spot price at contract maturity.

Palladium is mainly used in emissions-reducing auto catalysts for vehicles. According to reports, reduced auto tariffs from China are boosting demand expectations in an already tight market.

Some analysts are saying that demand for the metal in these pollution control devices has risen rapidly because more individuals are switching from diesel to regular fuel-powered vehicles, amid the plunge in global fuel prices.

At this time, professionals are grabbing all the palladium they can get their hands on, however, there are some short-term risks for speculative investors. But these risks could be overcome if the longer-term shortage forecasts are confirmed.

The short-term risks are technical in nature. Chart-watchers think the rally will run out of steam due to profit-taking at these record levels. They cite technical indicators such as the metal’s 14-day relative strength index (RSI) at an “overbought” level of 77 as one reason why traders should be watching for a short-term price correction.

Over the short-run if bullish speculators can stomach a potentially volatile correction then there may be a payoff later if supply continues to tighten.

According to London-based Metals Focus, Ltd., palladium’s deficit is poised to widen still further to about 1.4 million ounces at the start of the new year. Some analysts are also predicting that as many as 81.5 million automobiles are expected to be sold by the end of 2018 around the world. This is up 2 million from 2017, which supports the steady rise in palladium demand.

In addition to its use in the automotive industry, palladium is also used in electronics, dentistry, jewelry, groundwater treatment, and chemical manufacturing.

We’re not sure if palladium will continue to trade higher than gold, but it is something to note. Both commodities are dollar-denominated so they will benefit from a weaker dollar. The timing may be right for bullish traders because the dollar could weaken if the U.S. Federal Reserve decides to reduce the number of rate hikes in 2019.