Palladium pullback leads strategist to call it ‘the bubble that burst’, but bulls see upside

April 6, 2019

New York (April 6)  Prices of the highflying metal have been falling in recent trade — though they turned higher Friday — meeting resistance after reaching the latest in a string of record highs in late March as part of a rally that took the metal above the price of gold for the first time in 16 years. However, proponents of the metal, used widely in pollution-controlling catalytic converters in automobiles, believe the bull thesis for palladium remains in force.

Read: Palladium is worth more than gold for the first time in over a decade

Market strategists had been euphoric on the white metal at the start of 2019 on the back of tight supplies and strong demand from the automobile industry, which combined to take futures for the precious metal to a peak at $1,560.40 an ounce on March 20, according to FactSet data.

However, the metal has since tumbled by around 13%, putting the commodity deep in correction territory, defined as a decline of at least 10% from a recent high but not greater than 20% — and it could slide further, according to bearish strategists.

Ira Epstein, managing director, at Chicago-based commodities broker Linn Group, said: “It’s the bubble that burst,” describing the sharp downturn in palladium.

Epstein says faltering auto sales in hubs like Germany have upended palladium from its lofty perch and will likely result in a further skid for the precious metal.

On top of that, he speculated that car manufacturers may also be at a point of substituting platinum PLN9, +0.07%  for palladium PAM9, +0.86% given the price disparity between the metals which are both used in the converters. Platinum at roughly $904 an ounce was down 0.1% on Friday, but has rallied 7.3% over the past 30 days, while palladium has declined 8.2% over the same period.

Palladium prices were consistently lower than platinum from about 2001 to 2017. Market strategists have said that a spread between palladium of around $500 is the dividing line for when the gap between the metals make it economically feasible to replace palladium with platinum. That disparity stands at about $450 but had peaked at $750 back in March.

Strategists at Commerzbank in a research note dated Friday make the case that palladium will enter a bear market, falling at least 20% from its recent peak, despite expectations for tightening supplies

“We think that the palladium price has not finished correcting and expect it to fall to $1,200 per troy ounce by year’s end. The price premium as compared with platinum is therefore is lilely to shrink, " the analyst said.


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