Palladium Only Precious Metal Higher In 2013 So Far; Analysts See More Gains

October 18, 2013

LONDON (Oct 18)  A palladium market already outperforming other precious metals this year surged to a 1 ½-month high Friday, further boosted the last two days by expectations of continued accommodative U.S. monetary policy.

Palladium is the only precious metal which is up in 2013, largely based on expectations for a supply/demand deficit. The metal found support this year from supply constraints at a time of improving auto-sector demand, particularly in the U.S. and China. Analysts say they see potential for further gains in the months ahead.

The metal made a big spurt higher on Thursday with rest of the precious complex and added to its gains Friday. Traders cited ideas that potential for further congressional gridlock over budget and debt issues in the U.S. in a few months could mean the Federal Reserve won’t be tapering its bond-buying program, known as quantitative easing, any time soon.

Lawmakers reached a deal late Wednesday to end a 16-day partial government shutdown and extend the debt ceiling. However, the agreement only funds the government until Jan. 15 and raises the debt ceiling until Feb. 7, meaning markets only get a few-month reprieve before renewed worries that political stalemate could hurt the economy.

“Once the decision was made and with all of the conflict in the U.S. government, people are confident that the accommodative policies of the Fed are going to continue into 2014. That means cheap money,” said a North American trader. “You saw a pretty good influx back into these riskier type assets, whether they be precious metals or equities. Palladium is certainly benefitting. People looked at it as a cheap play at $700.

“That was apparent yesterday, and it’s still holding on with some supply-side issues at play.”

Palladium for December delivery on the New York Mercantile Exchange hit a high of $742.55 an ounce Friday, its strongest level since Aug. 29. After the pit close, the contract closed with a gain of $2.85 to $740.65 an ounce. Based on a spot-continuation chart, the metal was up 5% for the year.

Most analysts said supply/demand fundamentals are favorable for palladium, with many seeing this metal continuing to outperform platinum for a while yet.

“Demand for palladium has been quite good,” said Bill O’Neill, one of the principals with LOGIC Advisors. “There have been less supplies in the market, with reduced Russian supplies in particular.”

Russia and South Africa provide the bulk of the primary output in the global market. In particular, the amount of metal flowing from Russia is expected to slow due to a widely held view in the palladium market that state stockpiles – a closely guarded secret by the government – may be about depleted.

On top of this, there are ongoing worries about disruptions to supplies of platinum, palladium and rhodium due to labor issues that keep surfacing in South Africa, observers said. A senior union official at a Lonmin mine in South Africa was shot dead in the latest violence in the country’s PGM-mining region, adding to the worries about supply-related disruptions and therefore bullish sentiment, said a PGM trader.

“To me, this is a supply-driven rally more than anything,” O’Neill said of the year-to-date rally.

BMO Research late Thursday issued a quarterly report on commodities that included a forecast of a 757,000-ounce global palladium supply deficit this year and an 824,000-ounce deficit next year.

The economy of key commodity consumer China appears to be holding up well enough to imply continued demand, analysts said. A report on Friday showed that gross domestic product in the country grew 7.8% in the third quarter, matching the consensus estimate and up from 7.5% in the second quarter.

China has become the world’s largest auto market, and September passenger-vehicle sales rose 21% to an eight-month high of 1.59 million units. More significantly, autos in the improving markets of China and the U.S. are both fueled mainly by gasoline-powered engines, which can use palladium rather than more-expensive platinum. China is also the world’s largest consumer of jewelry made from palladium.

Some analysts foresee further gains for palladium, assuming there is not a tumble in gold that drags down other precious metals. Gold often leads the entire precious-metals complex, although platinum group metals also react to their own supply/demand fundamentals.

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