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(Kitco News) - Palladium prices hit their highest level in nine years Monday, and strong fundamentals could mean there is likely more upside to come. The metal is getting a boost with the rest of the precious complex, which has been supported lately by weakness in the U.S. dollar amid expectations for the Federal Reserve to undertake further quantitative easing. But additionally, palladium’s own supply/demand fundamentals enabled it to outperform the rest of the precious metals so far this year, including strong car sales in China and expectations that Russian palladium stockpiles are dwindling. The metal’s gains have accelerated on investment buying, particularly after the launch of a palladium exchange-traded fund in the U.S. this year. December palladium Monday hit a life-of-contract high of $620.00 an ounce on the New York Mercantile Exchange. On a monthly spot-continuation chart, the “We look for these prices to continue to build upon themselves,” said Dave Meger, director of metals trading at Vision Financial Markets. “I think you will continue to see some fund-driven, momentum-based moves to the upside.” K.C. Chang, economist who tracks platinum group metals for the consultancy IHS, said palladium potentially could hit the $700 area during 2011. “I think it’s going to continue. You do have robust demand coming out of emerging markets,” Chang said. Meanwhile, expectations for further stimulus measures in the U.S. are supporting financial assets generally, with some market participants seeking alternative investments. “Platinum and palladium are benefiting from this renewed investor interest,” he added. Some cautioned that there is potential for long-liquidation pressure later in the year. Many speculators tend to square positions and book profits ahead of year-end, which would mean selling pressure in a market such as palladium, where they are heavily long. But then in 2011, palladium could average $670 an ounce, said Rohit Savant, senior commodity analyst with the consultancy CPM Group. Recent weakness in the dollar has boosted palladium along with a range of commodities, particularly base and precious metals. A softer dollar makes commodities less expensive for holders of other currencies, thus can boost overseas demand. Expectations are for quantitative easing in the U.S., which may keep the dollar under pressure, analysts said. Support has also come from expectations for eventual economic improvement, some analysts said. This means increased demand for commodities with industrial applications. The main industrial use for palladium is auto catalytic converters. Already, this demand is strong in China, which last year became the world’s largest auto market, Chang said. Sales of Chinese passenger cars to dealerships rose 19.3% in September from the year-ago period, and sales for January through September were up 36.7% to 9.9 million units, according to a report earlier this month from the Chinese Association of Automobile Manufacturers. “Over 2009 and 2010, the Chinese government implemented tax incentives to encourage people to buy cars,” Chang said. “It’s true they have been pulling back in terms of those tax incentives. But, the rate of car sales within the country is still pretty strong and is overall generating fundamental demand for palladium.” Palladium tends to benefit more than platinum from a strong Chinese market, since it tends to have gasoline-powered cars, which can use less-expensive palladium. This also tends to be true for the U.S. and Indian markets, Savant said. “If you see heavy demand from these markets, you can expect an increase in fabrication demand for palladium,” Savant said. Analysts also cited a supportive supply picture. In particular, they pointed to recent reports suggesting that Russia’s existing stockpiles are declining and may even be nearing depletion. “There have been some assumptions that the Russian stocks are dwindling due to this significant increase in investor demand,” Meger said. “A portion of those stocks are believed to have come to market. And with those Russian stocks being significantly tighter than what they may have been, it adds to prospects of higher prices moving forward.” Russian authorities do not make the figures public. Nevertheless, the rise in prices reinforces the market’s collective notion that supplies are declining, Chang said. “According to our assumptions, that stockpile should be basically gone in the next year or two,” Chang said. If so, the market will be tighter than is currently the case, particularly if South Africa continues to face mining constraints. “We know South Africa, which is another major source of palladium, is having problems in terms of electricity shortages, which are likely to get worse going into 2012-2013,” Savant said. Additionally, mining wages appear to be rising faster than inflation in the country, pushing up cash costs.
ETF Investment Accelerates Rise In Palladium Prices “The offering of the (U.S.) platinum and palladium ETFs early in the year has certainly added a significant level of demand from the investor sector over the last several months,” Meger said. ETFS Physical Palladium Shares (PALL) began trading in January. Total reported ETF holdings around the world stood at 1.88 million ounces at the end of last week, up by around 716,000 since the start of the year, Savant reported. The supply/demand picture may be the main fundamental catalyst, but the ETF demand is the key factor resulting in an acceleration of the price gains lately, Chang said. “I believe fundamental demand in terms of auto sales is going to give a positive boost,” Chang said. “But the fact you’ve seen palladium and platinum prices increase…over the last month is being driven solely to investor interest. So you want to keep an eye on ETF holdings.”
By Allen Sykora of Kitco News; asykora@kitco.com |
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FOCUS: Palladium To Extend 9-Year High On Auto Demand, Supply Issues 25 October 2010, 2:16 p.m. |