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Heraeus Precious Appraisal

  • Edition 12 - 15 April 2019

Is palladium’s bull market over?

The fall in the ratio of US stocks to US GDP suggests that the palladium price might have peaked relative to platinum. The ratio of US stocks to US GDP reached a high point in Q3’18, which was higher than the peak in Q4 1999. The stock market has rebounded after a correction in Q4’18, but concerns of a recession are rising. China’s influence is much greater as it represents 25% (2.1 moz) of automotive palladium demand compared to 1% in 2000, but a downturn in the US (24%) would dent palladium demand. If US stocks turn down again that may confirm that the Pd:Pt ratio has peaked.

In fact the Pd:Pt ratio has fallen to 1.6 in April following the sharp correction in the palladium price along with platinum recovering to over $900/oz. Palladium’s strong price-run up to its record high at $1,604/oz in late March took the Pd:Pt ratio to over 1.8, which was higher than the peak reached in 2001, the last time palladium traded at a premium to platinum.

Indications of palladium market liquidity have eased. Lease rates have fallen back to single digits and normalised, with the longer-term rates now being higher than the shorter-term rates. Palladium futures are still in backwardation (spot is priced higher than the futures). If the palladium futures move into contango (futures priced higher than spot) that would signal a further easing of conditions. In 2001, the futures market remained in backwardation for a month after the palladium price peaked and then reverted to the more normal contango.

Notwithstanding the above observations, the palladium market is forecast to be in considerable deficit this year. Palladium demand is being driven by increasing global gasoline car sales and tightening emissions legislation. Meanwhile, the platinum market is projected to have a notable surplus this year even with all the ETF buying that has occurred. This should favour palladium over platinum in the medium term.

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