FxWirePro: Load-up longs for Palladium versus Gold as industrial metal to outpace yellow metal among PGM bloc

Given that palladium is widely regarded as the most “industrial” metal within the precious metals complex and more closely linked to the business cycle, it is not surprising that its price rose at the strongest pace, gaining on the back of a rally in industrial metals to re-test the psychologically important $1,000/oz level. The precious metal’s demand and supply balance sheet are compelling, with positive demand growth in autos and electronics. Supply growth is challenging and global production is set to gradually decline over coming years, after a 3% decline in 2016.

It has already been stated in our past posts that the palladium’s fundamentals are arguably tighter than most of the base metals markets under our coverage, we still believe it will be susceptible to this risk-off, industrial metals-led sell off into the year-end. 

Although a weaker South African rand should make palladium production more attractive, in practice, the elasticity of palladium supply is much lower than that of platinum, since around 95% of its production is a by-product of either platinum or nickel mining. We forecast palladium prices to average $980/oz in six months.

Long palladium spot vs gold at 1.30x ratio, target 1.25x. As the most industrial of the four precious metals, palladium will see prices continue to rise on the back of higher demand from the automotive industry, while investor appeal for gold will continue to dwindle as the opportunity cost associated with rising interest rates weighs on gold prices. We recommend buying palladium vs gold at current levels, targeting a 1.25x ratio.