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Idea of the Day: What next for Palladium

What: The price of the precious metal palladium has more than doubled in the last 2.5 years, and it briefly touched $1000 per ounce on Monday, the highest level since 2001. Although it couldn’t sustain life above this level, the palladium story looks supportive for further price gains and palladium is the best performing precious metal so far this year.

The driver of palladium price gains is the move out of diesel cars and into electric vehicles, with palladium being one of the key metal ingredients in batteries for electric cars.  

The question now is, where will palladium go next? One can assume that global air quality concerns will not abate, which puts pressure on car manufacturers to favour electric vehicle production over diesel. However, the inputs for electric cars, such as the mineral cobalt, can be difficult to find and expensive, which could slow down or even halt production of electric vehicles, keeping diesel cars around for a little while longer. Thus, palladium’s fortune may be dependent on the outlook for other minerals necessary for electric car production, rather than its own fundamentals.

There are a few things to consider when thinking about palladium: first, supply and demand. Palladium supply is at its lowest level for 14 years and demand has been outpacing supply since 2011.  There is a strong potential for an ongoing supply deficit in the coming months, which could trigger a further price rise. Second, the global growth outlook, and third, any potential pitfalls that could disrupt the production of electric vehicles, such as cobalt mentioned above. Also worth considering are the dynamics of the precious metals market. The palladium/ platinum ratio is firmly supportive of further palladium gains, which highlights the demand for this metal over platinum, which is typically used in diesel cars.

How: Overall, we are bullish on the outlook for palladium and believe that unless we see a significant shift in palladium’s supply and demand fundamentals, or sufficient production disruption caused by tight supply in other key input markets including cobalt, then we may continue to see further price gains in for palladium. From a technical perspective, there is nothing to suggest that this metal will not push higher. Unless we see a drop below $950, which could signal further losses, we believe that we could see a return to $1010 in the short term, with a potential for a $50 price rise to above $1050 by the end of the year, based on the rate of gains in recent weeks.

Chart 1: The palladium/ platinum ratio remains in palladium’s favour, and is at its highest level since 2001. 

Source: City Index and Bloomberg 

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