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This metal will hit $2,000 before gold does - analysts

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This metal will hit $2,000 before gold does — analysts

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(Kitco News) Palladium is the standout precious metal this week as it hit new record highs while the U.S. markets were closed for the Thanksgiving holiday.

The precious metal climbed to a new record high of $1,841 early on Thursday. At the time of writing, December palladium futures were trading at $1,816.60, up 0.29% on the day.

“Palladium is the only one moving higher, which is bucking the trend a little bit, not only relative to gold but to industrial metals as well. Aluminum didn’t have a particularly good day this morning, neither did copper. And here’s palladium, just hitting record after record here,” TD Securities head of global strategy Bart Melek told Kitco News on Thursday.

Year-to-date, the metal is up around 60%. Looking back, palladium saw clear price peaks established at the end of March, July, October and now November.

Going into 2020, analysts are confident the metal will keep climbing to new record highs next year, notwithstanding some natural pullbacks that follow rallies.

“It is not particularly surprising that palladium is doing well. We think it will hit $2,000 at the latter part of next year when gold does better as well,” Melek said. “We formally have $2,000 average in Q4 2020, but given normal volatilities, it could be $2,100-2,150. We wouldn’t be shocked if that happened.”

A correction would be a natural thing to see sometime soon, said Capital Economics chief commodities economist Caroline Bain.

“We are still of the view that prices got a bit ahead of themselves despite positive fundamentals. We think there could be a correction at some point soon, but ultimately prices will continue to rise next year,” Bain said.

It’s all about supply-demand fundamentals

When it comes to palladium’s price rally, it is all about the supply-demand fundamentals, according to analysts.

The majority of palladium’s demand comes from the auto sector as the metal is used in catalytic converters that reduce emissions in gasoline engines.

“Ultimately, what the market is trying to price in here is scarcity down the road. There is certainly isn’t a lot of new capacity coming in from the mining side. Recycling is probably steady. We expect a bit of inflection on the demand side and not really seeing significant growth on supply,” Melek said.

TD Securities estimates significant deficits of the metal in 2020 and 2021.

Even though Bain was surprised to see palladium rise so high so quickly, she highlighted that none of the other metals are experiencing this strength in demand.

“There is a very strong fundamentals case for higher palladium prices. The market has been in deficit for many years and we’ve got a surge in demand because of tighter emissions regulations coming in from China and the EU,” Bain pointed out.

Substitution is a long game

Substitution is a long-term game that will only likely change the mix used to make catalytic converters rather than completely substitute palladium with platinum, according to analysts.

“Platinum is the one everyone is looking at for substitution because it has very good catalytic properties, but it does not function as well at high temperature environment. It can’t be fully substitutable, but the mix might change,” said Melek. “When we talk substitution, no one is arguing 100% substitution.”

Plus, analysts don’t see substitution happen any time soon.

“Every auto producer right now wants to make sure that these catalytic properties fully satisfy the regulators and therefore they might very well be quite comprehensive testing going on before they start using this new technology. Might take a while,” said Melek.

The timeline for a real case of substitution could be around two years or so, Bain pointed out.

“There can be a little bit of substitution, but do it on a meaningful scale, is probably a couple of years away in terms of technology and making sure it is cost-effective to do so,” she said.

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