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Record-Setting Palladium Outshines Gold, Other Precious Metals

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(Kitco News) - Palladium prices hit yet another fresh record high Tuesday, topping $1,600 an ounce for the first time, and traders are looking for still more gains in a market described as tight.

“Palladium is now a leader in precious metals; price makes news and [the] media discovered it,” said George Gero, managing director with RBC Wealth Management.

Palladium, historically the cheapest of the precious metals, has raced to large price premiums over both gold and platinum. As of 10:08 a.m. EDT, spot palladium was trading up $14.20 to $1,590.55 an ounce after peaking overnight at $1,601.45.

“Palladium has rapidly run on a broad supply shortage, seeing prices rise almost 90% since the bull run accelerated from August last year,” said a research note from commodities brokerage SP Angel.

One of the most recent drivers of higher prices is news reports that Russia is planning to stop exports of scrap precious metals from May to November. Along with South Africa, Russia is one of two largest producers of palladium in the world.

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The worries about supplies come at a time when automotive demand for palladium in catalytic converters has been robust. Even when car sales weaken, analysts point out that yet another factor is boosting demand – increased loadings of metal in each vehicle in order to meet more stringent anti-emissions regulations in a number of key nations.

One U.S. desk trader commented that time will tell whether the Russia development will have a meaningful impact on palladium, but nevertheless said that “nerves are fragile,” and thus market participants feel most comfortable holding long, or bullish positions.

“Availability of metal is very scarce,” Afshin Nabavi, head of trading at trading house MKS (Switzerland) SA., told Kitco News.

Still, he added, the continued backwardation is not as dramatic as it was a month ago. Backwardation in any commodity occurs when nearby prices are more expensive than deferred contracts, showing that users are willing to pay a premium in their efforts to get the commodity right away.

“In addition to the growing supply angst, large automakers have announced price cuts to their vehicles sold in China after the nation announced that it will reduce the VAT [value-added] tax by three points — spurring hopes that car sales in the Middle Kingdom, which have been horrible of late, could see a path towards recovery,” said a research note from TD Securities.

Analysts with Commerzbank attribute much of palladium’s strength to speculative buying interest.

Johnson Matthey last month issued a report saying that the market remained in a supply/demand deficit in 2018. The firm reported record demand of 8.66 million ounces for the metal in automotive catalysts and also strong consumption by the chemicals industry.

Some of the demand was met by disinvestment from exchange-traded funds, Johnson Matthey said. However, with ETFs holding only 730,000 at the end of 2018, compared to nearly 3 million at their peak in 2014, there is not enough metal to bridge the gap between industrial demand and supplies, Johnson Matthey said. Thus, the deficit in the palladium market is likely to “widen dramatically in 2019,” the firm said.

“Excluding investment, the underlying ‘structural’ deficit in palladium is forecast to approach 1 million ounces in 2019; even if all remaining ETF holdings were liquidated, this would not be sufficient to fill the shortfall,” Johnson Matthey said.

Gero and Nabavi are among those who look for more gains.

Nabavi commented that the $1,600 area might act as resistance for a while. But if this is breached, “we could head to much higher levels,” he said. This especially will be the case as long as there are not new sources of supply, but demand remains robust, he added.

Some analysts have even suggested that $2,000 an ounce is possible, Nabavi said, but he added that this will “take a bit of time.” He described the price rise as having order on the charts, with prices coming back to fill any chart gaps that get left behind.

“I expect more of the same,” Gero told Kitco News. “I expect tightness. I expect continued higher prices as we see less bars coming to the [New York Mercantile) Exchange for delivery.”

Palladium tends to end up in “sponge,” a powdery/grainy form that can be used by industry, he explained. And, he continued, strong demand is coming from China for both batteries and automobiles.

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