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Commerzbank: palladium's wings to be clipped

Kitco News

(Kitco News) - Commerzbank is comparing palladium to the mythical Greek figure Icarus, who came so close to the sun that the wax on his wings melted and he crashed.

In the case of palladium, Commerzbank says the metal has been behaving like other commodities that have rocketed into “bubble” territory, thus analysts look for a large correction lower in palladium by the end of the year – just like oil and silver prices roughly a decade ago. Nevertheless, the bank upped its year-end palladium forecast to $1,700 an ounce from $1,500 previously.

Spot palladium hit a record high of $2,556.95 an ounce earlier this month, and in the process traded above the old record highs in both gold and platinum. As of 10:48 a.m. EST, the metal was at $2,381.35, down from the peak but still a gain of 23% so far in a little more than three weeks into the new year.

“The palladium supply is tight and demand has been robust until now, which can at least partly explain the price jump,” said the report from Commerzbank, written by analyst Carsten Fritsch. “The massive increase in palladium is likely to slow demand and encourage the automotive industry to replace it in favor of much cheaper platinum. We expect a significantly lower palladium price at the end of the year than we see at the moment.”

Commerzbank commented that the “dynamism of the price rise is exceptional,” considering palladium was still below $2,000 at the start of the year. The metal took 10 months to climb from $1,500 to $2,000, but only one month to gain another $500.

“It now looks to us as if a bubble is forming in palladium that is reminiscent of other bubbles in the commodities sector, such as oil in 2007-08 and silver in 2010/11,” Commerzbank said. “The oil price increased almost three-fold between early 2007 and mid-2008, but then shed three quarters of its value within just five months. Silver likewise nearly tripled in price between August 2010 and April 2011 but had plunged by almost half again by December 2011. The price surge both in oil and silver accelerated in the last three months before prices peaked.”

Commerzbank said it looks for palladium demand to remain strong, with the metal used in automotive catalysts. The latest demand boost came from tougher emissions regulations in countries like China, which meant higher loadings of platinum group metals for each vehicle. Prices of sister metal rhodium have soared even faster than palladium.

Still, the high prices are likely to have some “braking effect,” perhaps prompting a move into less-expensive platinum for auto catalysts, Commerzbank said. The market could also be impacted by the possibility of punitive tariffs on cars imported into the U.S. from Europe. The high prices could also mean more recycling, which means more supplies, Commerzbank continued.

“We are therefore sticking with our prediction that the palladium price will come under pressure during the course of the year,” Commerzbank said. “However, due to the much higher price level now, we are upwardly revising our forecast and expect a price above $2,000 per troy ounce until the second quarter. We have likewise raised our year-end target somewhat, and now envisage a price of $1,700 (as compared with our previous forecast of $1,500).”

The bank forecasts that platinum will trade around $900 in the middle of 2020 and finish the year at $950.

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