Whoosh! Palladium sprinted clear of $300/oz in early October, fixing in London at $339/oz on 20th October. This was its highest close since August 2008. But this price strength doesn't seem to be based on any clear supply and demand trends. The car markets are mixed.
The Chinese car market continues to post fantastic sales (and production) figures, but the US market suffered a September hangover, as the cash-for-clunkers binge ended. Sales in the US were 27% lower year-on-year, compared with a 4% gain in August, at the height of the incentive scheme.
While it may be that this is no worse than it would have been, in a world without the stimulus package - year-on-year growth was negative 41% in February 2009 and had only recovered to negative 30% in July, prior to the cash-for-clunkers scheme - it does imply that a return to 'normal' levels in the US market might take years. Against that, European car sales held up reasonably well, despite some key incentive schemes ending, although this is more important for platinum.
On the jewelry side there is less uncertainty, but Chinese trade data is not that encouraging. Chinese unwrought palladium imports in August were 2.4t, slightly higher than July and the highest since February 2008. But in Hong Kong, July imports, at 1.8t, were down from 3.1t in June, and with exports (ex-China) at 0.4t, up from nearly nothing, net imports were lower still. That leaves the most obvious explanation for the price rally - investment fever.
A sign is that gold, platinum and palladium have all gained similarly in price - up 11%, 10% and 13% (respectively) since the start of September, although palladium's gains have been much more concentrated in the last few weeks. This follows a surge in demand for the UK palladium ETF, which rose from 391,573 oz as of 28th August to 543,070 oz by 16th October. This rise of more than 150,000 oz in a month and a half is the fastest pace of inflows seen in the UK palladium ETF since March 2008, when palladium was soaring on the South African power crisis.
Palladium Outlook
Palladium has benefited from government-aided rescue schemes in the car market and general Chinese buoyancy. But its current high price owes more to a resurgence of investor interest and that, we think, is based more on macro-economic trends, in particular fears of a collapsing dollar, which could easily reverse. In the absence of that, and with platinum running into stronger headwinds, we expect more modest gains, but a US ETF launch could change things. Short-term London fix: $300/oz-$360/oz.
Courtesy: Fortis Metals Monthly
