Historically a minor player in the group of precious metals, palladium is in the limelight especially after it sparklingly outperformed even gold this year. While the yellow metal has been trapped in the narrow $1,180-1,240-an-ounce range for much of this year, palladium witnessed a strident price rise to a record high of $1,270 an ounce on December 13 recording a 50 per cent increase since August. For the first time since 2002, gold trails palladium.

Indeed, palladium has left its sister metal platinum well behind with the latter trading at close to $800/oz. Traditionally, the situation was reverse - palladium almost always trailed platinum. Interestingly, while the two metals are in precious metals group, their main application is industrial. Both are used in catalytic converters in motor vehicles. In other words, the price of these two metals is substantially driven by vehicle sales volumes. The metal is used in other industries such as electronics, chemical, dental and jewellery too.

Consumers in Western Europe are slowly shifting from diesel to gasoline cars while in other emerging markets such as India gasoline cars are popular. This trend is seen boosting demand for the metal. The trigger for the recent price spurt was of course the strong expectation that the Chinese government will reduce import tariffs on US cars from 40 per cent to 15 per cent (as part of 90 day truce between the two countries) which should boost tepid car sales.

Speculative investors too have played a marked role in boosting palladium prices with infusion of funds to take advantage of market conditions. It is well recognised that speculative capital exerts an exaggerated price action in the commodity market.

Because the palladium market is in fundamental deficit, market rates have been rising steadily. From an average of $615/oz in 2016, the rates climbed to $870/oz in 2017. The deficit is expected to continue well into 2019 and 2020, creating unusual price expectations.

However, belief is now gaining ground that the current price levels are unsustainable as the basis of price rally lacks a solid long-term foundation which in turn raises the possibility of a correction. Importantly, there is expectation of a slowdown in auto sales in China and the US in 2019. Demand from the electronics industry may also slow.

Also, given the wide price differential between palladium and platinum, automakers and others are more likely to replace the expensive former with the relatively economical latter wherever feasible. In the event, speculative investors are sure to exit their long positions in droves, creating conditions for a sharp correction.

Without doubt, the palladium market is small and therefore price swing can be wild. It should surprise none if prices were to drop close to $1,000/oz in the second half of next year on the back of expected US growth slowdown.

For the same reason, gold will receive a boost as it is expected to regain its safe haven status and investors move to risk-off assets. In other words, palladium’s premium over gold may be short lived. The US Federal Reserve’s meeting on December 18-19 should provide direction to the metals market. While a rate hike appears reasonably certain, guidance for 2019 will be critical.

The writer is a policy commentator and commodities market specialist. Views are personal

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