Market News & Analysis
Did Palladium Fly Too Close To The Sun?
Matt Simpson November 12, 2019 6:20 AM
Now the world’s most valuable precious metal, Palladium prices have continued to soar this year after surpassing gold’s value in March. Yet its bump at the highs suggests a much-needed correction is underway.
High demand and low supply palladium has been a key driver for spot prices, since about 85% of its supply is used in exhaust systems in cars to help turn toxic pollutants into water vapour and carbon dioxide. Since 2016 it has nearly tripled in price, although the 40% rally from the October low goes to show how parabolic its trend has been of late.
Gains from trough to peak:
- April 2003: +1,140.3%
- January 2016: +298.5%
- August 2018: +120.7%
- October 2019: +43.2%
Whilst we cannot claim to have predicted the top, it wasn’t without warning either. We can see that gross short exposure had been creeping up into the price highs and has dragged net-long exposure to a 6-week low, ahead of last week’s top. Gross-long exposure had also peaked around levels that have been associated with corrections since mid-2018, so whilst positioning is not flagging a sentiment extreme, it could point towards a deeper retracement for the metal.
Technically, palladium appears poised for a re-test of its bullish trendline. Since peaking just beneath 1,800, a lower high formed before breaking a prior low and warning of a change in trend. Given it has fallen over 7% in the last two sessions, bearish momentum is clearly picking up and further losses appear more likely. Yet despite these losses, price action remains overextended relative to its 200-day MA.
Moreover, if we’re to see similar levels of volatility today that we have over the past two, it could retest 1,600 later today.
Taking this a step further, the palladium/gold ratio suggests there could be further downside for palladium. Whilst the relationship is not perfect, we can see the ratio crossing above/below its 20-day MA has picked some decent turning points on spot palladium. We’ve outlined a bearish scenario on gold yet palladium still remains relatively high and possibly over stretched from its long-term average. Therefor we’ll continue to monitor to see if the ratio remains beneath its 20-day MA, as it could suggest palladium may consider breaking its long-term bullish trendline.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.