Metal appears to be 'overvalued' relative to others

G. Chandrashekhar

Behind the run

Palladium's value

has increased 81 per cent since July 2005.

Size of

the market makes the metal vulnerable to wide price swings.

`Substitution' theory

will keep investors holding long positions.

Mumbai July 23

Gold displayed impressive rally since the middle of 2005. It appreciated by close to 70 per cent between July last year and its peak of $740 reached in May this year. The turbulence across most financial markets in May prompted a sharp slide in gold prices. The yellow metal has of course made some recovery since then.

Despite sharp price correction downward and recent modest recovery, the metal can still boast of a 52 per cent increase in price during the last 12 months. But the solid performance notwithstanding, gold's appreciation is actually less lustrous when compared with other metals. Look at silver and palladium. At their peak in May, both silver and palladium found their values surge by 124 per cent and 116 per cent respectively although fundamentals did not justify such a sharp price rise. In contrast, platinum saw its value surge by "only" 48 per cent over the same period. Despite strong fundamentals supporting a bigger rally, the metal appreciated the least.

From July 2005 to July 2006, the value of palladium has increased by 81 per cent against 52 per cent of gold, 59 per cent of silver and 43 per cent of platinum, making palladium appear to be "overvalued" relative to other precious metals. Does this mean one should start to sell palladium?

Vulnerable to swings

"Not necessarily", asserts an analyst with Barclays Capital stating that since palladium has looked weak for sometime and in such a small market timing is everything. The tiny size of the palladium market makes it vulnerable to wide price swings as the action of a few investors has a significant impact on prices.

On the other hand, the cheapness of palladium relative to both platinum and gold has fuelled expectations for an increased use of it in auto-catalyst and jewellery sectors, lifting investor interest towards the metal. However, it would be some time for the price-induced demand effect to significantly impact demand-supply balance.

"Nevertheless as long as palladium remains cheap relative to the rest of the complex, such "substitution story" might well keep investors holding on to their long positions, thus supporting prices despite the absence of any compelling fundamental reason to justify it", Barclays asserted.

(This article was published in the Business Line print edition dated July 24, 2006)
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