FxWirePro: Platinum eyes Gold, palladium on copper- Is parity condition unsustainable?

The ratio between platinum and palladium reached parity in early September 2017 but was not sustained until later in the month, with palladium trading at a premium to platinum on a consistent basis since then. The ratio currently stands at 0.96. Palladium is trading at its highest level since 2001, the last time that the ratio was at parity and its premium to platinum is widening. As a consequence, the big question is when substitution in the auto-catalyst sector starts to kick in.

As per the SG analysis, it shows that palladium tends to be more influenced by copper prices – as a proxy of risk sentiment/industrial activity – while platinum tends to be more influenced by gold price action, as indicated in the chart below.

Historically, the global platinum and palladium auto-catalyst demand has closely tracked the platinum to palladium price ratio, as automotive manufacturers have sought to optimize costs.

Stay short Jan’18 NYMEX platinum As gold loses its luster in 4Q, we think the recent support platinum enjoyed from July through early September will continue to break down as well, especially given that the fundamentals for platinum remain uncompelling, to say the least.

Moreover, as fresh longs established amidst the rally in prices over the last couple months have driven net positioning long again to nearly 24,000 contracts, almost level with the peak in net length reached earlier this year, we see length approaching stretched levels.

As such, it is reckoned that the prices likely to declining to average $930/oz in 4Q’17 before weakening further to $910/oz in 1Q’2018.  Half profit on this position was decided to book and trail our stop for the remaining half unit to $950/oz as prices approached a key technical make or break at between $923/oz and $890/oz.

Initiated shorts in Jan’18 NYMEX platinum at a price of $978.90/oz on September 15, 2017. We squared off to book half profit in the recent past at 924.10/oz for a gain of 3.0%.  Uphold the rest for a trade target at $880/oz with as top for the remaining 0.5 units at $950/oz. The outstanding half unit is marked to market in the recent past at $922.29/oz for a gain of $28.31/oz or 2.9%. Source: JPM, SG