Palladium is part of the platinum group metals that is used extensively in manufacturing. It has a reasonable strong correlation to platinum but also other precious metals such as gold and silver. Its price during the last couple of months has primarily been driven by the movement in gold and platinum. At the start of October the metal was trading at $630, but by the end of the month it had fallen to $595. Early November saw it above the $600 mark, but last week it jumped by seven per cent in a day between Tuesday and Wednesday.
According to Ole Hansen, head of commodity strategy at Saxo Bank: “The unilateral spike was triggered by Johnson Matthey, a world leader in platinum distribution, who in their 2012 interim review for palladium projected a shortfall of 915,000 ounces for 2012 due to lower mine supply, less Russian stock sales and record auto catalytic demand.
“While platinum is very dependent on mine supply from South Africa, palladiums biggest single source of supply for many years has been from the release of stocks accumulated by the former Soviet Union. These reserves, whose numbers have never been released, are dwindling and could be gone within a few years, leaving mining and scrap as the two main sources of supply.”
Hansen believes the market will continue to focus on the supply deficit, but whether this will result in an better performance than platinum remains to be seen. “Palladium is the least traded of the two and often suffers from lack of investor interest due to its illiquidity and ability to trigger sharp price moves in both directions. It remains the worst performing metal this year as its down five percent compared to minus two per cent for copper and plus 10 percent on platinum,” he added.
What to do?
With the platinum supply situation in South Africa returning to some sort of normality palladium has the potential to further out performance it, according to Hansen. “The outright performance is determined by, among others, gold which needs to break $1740 in order to move higher. Until such time we prefer any exposure to be on a spread basis to platinum.”