Palladium Near Its Highest Level in Almost a Year

We observed earlier this week that Platinum and Palladium Have Broken Out from a year old trading range. Interestingly, the breakout has gone rather unnoticed. Sporadically, we have seen commentaries about the breakout. From an investing point of view, we consider this as very positive, as momentum buyers are not entering the market (yet).

One of the few commentaries this week came from Frank Holmes, who detected two global events affecting the palladium and platinum market. He believes that “the situation in Ukraine and Russia along with six-week-long strikes in South Africa began raising concerns that these palladium-rich countries may not be able to continue supplying the commodity at normal levels. Currently South Africa supplies around 37 percent of the world’s palladium; Russia supplies close to 40 percent of the world’s palladium.”



You can see the effect the political landscape is having on palladium. Over the past year, the metal has mainly traded sideways, but this week hit its highest level in almost a year. The precious metal reached $775 per ounce while its sister, platinum, climbed to nearly $1,500 an ounce.

In January, I indicated that platinum and palladium looked extremely compelling. There were supply and demand drivers I felt would drive the metals higher.

Just this week, the U.S. Mint is “ending a four-year exit from the market” by selling one-ounce American Eagle platinum bullion coins, writes Frank Tang from Reuters. According to a wholesaler this week, initial demand is strong, as 1,000 coins have already been scooped up.

Like I discussed with Resource Investing News at the Vancouver Resource Investment Conference, industrial demand has been gaining strength. Take rising automobile sales in the U.S. that I talked about a few months ago. With interest rates on car loans so low, Americans have been replacing their clunkers with more fuel efficient cars, which is positive for platinum and palladium.

It’s a similar story in emerging markets. In Africa, the GDP without a leveraged economy is still growing at 5 percent, and you definitely need platinum and palladium for their vehicles, even if they are diesel.

In China, vehicle sales last year rose faster than expected, climbing nearly 14 percent compared to a year earlier, according to the China Association of Automobile Manufacturers. The country is already the biggest automobile market in the world and millions of new cars on the roads add up fast.

Furthemore, we have found an extremely interesting chart on Marketwatch. In Palladium Is The Metal To Own, the author compares the price evolution of the four precious metals. One common perception is that all precious metals move simultaneously. That is not true, as palladium and platinum have dynamics which differ from the ones of gold and silver, although that is not always reflected in the price evolution.

gold_silver_palladium_platinum_2013_2014The chart shows how gold and silver were smashed down in the last 12 months while palladium has held up very well. Palladium looks extremely compelling.

The above chart also reveals that palladium’s fundamentals and its price are nicely aligning.

As a general rule of thumb, we all know that fundamentals are not always reflected in the charts. It mostly takes some time until the price follows fundamentals. For palladium in particular, there is a very high probability that its chart starts reflecting the strong supply/demand fundamentals. It this trend continues, then we are in for very interesting times, at least for investors who had the courage to get in at this price point.

Palladium supply/demand picture

The palladium ended 2012 with a huge supply deficit of 1.07 million ounces—this, after 2011, when it boasted a surplus of 1.19 million ounces. The huge reversal was due to record demand for auto catalysts and a huge swing in investment demand—going from net selling to net buying in just 12 months (source). This trend continued in 2013.

We remind readers of the supply/demand imbalances, which make the case for palladium so compelling. This is a summary of the fundamentals as analyzed by Rick Rule (source):

  • The palladium market is getting tighter and tigthter. The sector is facing a supply shortage since 2012.
  • Russia has historically maintained a sizeable palladium stockpile which has represented a key source of supply over the past two decades. The supply overhang from Russian stockpiles was officially close to being depleted in 2013. That is significant since those stockpiles were a main contributor in balancing the palladium market for the last ten years.
  • The Norilsk mines in Russia, which produce more palladium than the next four largest palladium producers combined, calculated to account for 42% of global supply, is not expected to expand its annual palladium production for at least 10 years. In addition, the existing operations are reported to be having difficulty maintaining their average 2.7 million ounces of annual production due to diminishing ore grades at depth within the ore bodies Norilsk is mining. 
  • Palladium demand has been robust; it has been primarily driven by increased use in autocatalysts, the demand for which was forecasted to increase by 7% in 2013. 

We will keep readers informed on the supply/demand statistics of 2013 once they become available.

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