For precious metals traders looking for opportunities for growth in 2024, analysts have pointed to the recent downturn in palladium as one possible choice, but the silvery white metal could still see additional downside in the future, according to analysts at TD Securities.
Palladium prices recently slid below $1000/oz for the first time in half a decade. This came despite reports of sanctions on the largest precious metals refinery in Russia, and “even as forwards were aggressively borrowed,” according to Daniel Ghali, Senior Commodity Strategist at TD Securities.
Despite falling to its lowest price since 2018, Ghali said it has room to fall further as its “price action is only ‘almost extreme.’”
“Our change-detection framework suggests the price action is still consistent with recent history,” he said. “Under the hood, however, the framework suggests that price action is inching towards an extreme threshold, implying oversold conditions are near.”
TD Securities change detection signal. Source: TD Securities
Ghali said this market timing signal “suggests price action is consistent with a downtrend even as prices challenge the psychologically important $1000/oz range, suggesting the set-up is not yet ideal for a countertrend rally.”
“CTA trend followers have held an effective 'max short' position size for months, but still have a large margin of safety before covering,” he added. “The first buying program is only likely to hit the tapes above $1225/oz. Discretionary funds have also accumulated their largest net short position in years. Even the latest-shorts therein have an average price near $1175/oz, limiting their pain.”
Analysts at Commerzbank also noted the weakness in palladium, highlighting that the metal has seen a nearly 15% drawdown since the beginning of the week.
“This is likely because of the expected decline in demand from the automotive industry, which accounts for just shy of 85% of palladium demand,” the analysts said. “Palladium is currently only $100 more expensive than platinum. The last time the price differential was any lower was in August 2018.”
They noted that a year ago, palladium enjoyed a premium in excess of $1,000 over platinum, but that has now dwindled to $100 as palladium has continued to drift lower while platinum has rebounded to see slight gains.
Platinum vs. palladium 4-hour chart. Source: TradingView
“The pronounced slide in the palladium price – which has plummeted by 45% since the beginning of the year – and the marked fall in the price differential could reduce the substitution effect in the automotive industry next year,” the analysts said. “The World Platinum Investment Council (WPIC) has so far been predicting that demand will shift by a good 600,000 ounces in favor of platinum this year.”
Despite the extended weakness and persistent selling, the analysts expect to see a recovery for both palladium and platinum in the near future as they are currently showing signs of being oversold.
“We regard the massive weakness of platinum and palladium prices to be exaggerated and expect a countermovement in the near future,” they said.
“Fundamentals are tightening up notably in palladium with sponge premiums (having been $2-4/oz for months+) now trading at $4/oz and the forward curve steepening marginally,” said Nicky Shiels, metals strategist at MKS PAMP. “But futures & flat prices fell out of bed, falling through $1000/oz and the lowest level since 2018; Palladium is now down 45% YTD with prices 1/3rd of the peak in 2022 at $3000/oz following the Russian invasion.”
Shiels noted that the physical tightness stems from the UK sanctions on Russian refiner Krastsvetmet JSC, and said it could lead to “fear hoarding” if the U.S. follows suit.
“With Russian flows circumventing trading desks since March 2022 and the rise in sanction risk, there's been three notable outcomes: prices have been on a rather contained one-way street lower, China has started importing most of Russian PGMs and liquidity has been sapped, accelerating any move,” she said.
“Overall, the market is clearly extremely oversold and short into production cut and lower recycling headlines, and that may not [be] wrong until the Palladium bears get what they want (price parity with Platinum {?} which is only $130 now and the narrowest it's been since May 2018),” Sheils said.
She concluded by noting that the palladium cost of production at U.S. operations “is sitting at a lofty US$1,922/2Eoz (R35,738/2Eoz) for Q3 2023 due to ‘higher than expected contractor costs and persistently high inflationary cost pressures on stores and other operating costs.’”
“Prices are at unsustainable levels,” she said.
According to Jay Kaeppel, senior market analyst at Sentimenttrader.com, the recent sell-off may present a prime buying opportunity as December through February is “historically the best time of year” for palladium.
At the time of writing, palladium trades at $1039, an increase of 1.8% on the 24-hour chart.
Platinum 4-hour chart. Source: TradingView
