2023-04-27 13:16:57 ET
Summary
- Palladium saw a record high in 2022 and a brutal correction: Futures markets tend to extend on the up and downsides.
- Palladium is the least liquid precious metal in the markets. Illiquidity increases volatility.
- A March bottom leads to a bullish pattern: Significant price swings in April.
- Several factors support a bullish case for palladium: Russia, the green agenda, and thin liquidity.
Palladium has long been the metal of choice for gasoline-powered automobile catalytic converters. However, fuel cells now use palladium to power cars and buses. Palladium’s density and high melting point make it ideal for fostering the hydrogenation of unsaturated hydrocarbons and for applications in jewelry, dental fillings and crowns, watchmaking, blood sugar test strips, aircraft spark plugs, surgical instruments, and electrical contacts. Classical or concert flutes tend to be made from palladium.
In 2022, there were 210 tons of palladium production, with 80% coming from Russia and South Africa.
The chart highlights that in 2022 Russia was the leading palladium-producing country.
Palladium’s price reached a record high in March 2022 before a dramatic correction took the metal to its most recent bottom one year later in March 2023.
A record high in 2022 and a brutal correction
Palladium’s explosive ascent began in 2017 when the precious and industrial metal broke out above the 2001 $1035 per ounce high.
The long-term chart highlights the bullish trend that lasted until March 2022, when NYMEX palladium futures peaked at $3,380.50 per ounce, more than triple the level at the 2001 high.
Palladium ran out of upside steam in March 2022, and the price fell steadily over the next year. The implosive correction took palladium to a $1,336 low in March 2023. Meanwhile, the metal held above its long-term critical technical support level at the previous 2001 $1,035 high.
Palladium is the least liquid precious metal on COMEX and NYMEX
Open interest is the total number of long and short positions in a futures market. Together with daily volume, the metrics are the critical factors determining liquidity. Liquid markets tend to display less volatility as they have activity and participation at every price level. Meanwhile, illiquid markets are far more volatile as bids to purchase disappear during selloffs and offers to buy evaporate during rallies.
The June NYMEX palladium futures chart highlights a total open interest of 12,270 contracts. At $1,508.40 per ounce, with each contract representing 100 ounces, the total value of the palladium futures market on April 25 stood at the $1.85 billion level. Meanwhile, the average daily volume of palladium futures tends to be below 5,000 contracts or under $754.2 million.
Comparing palladium to the other precious metals trading on the CME’s NYMEX and COMEX divisions illustrates that palladium is the least liquid of the precious metals trading in the futures arena:
- On April 25, NYMEX platinum’s open interest was 72,125 contracts. With each contract containing 50 ounces and the price at $1,100, the platinum futures market’s value was $3.967 billion, over twice the value of the palladium futures market. The average daily volume in platinum futures is around 20,000 contracts, worth $1.1 billion.
- COMEX silver’s open interest was 149,692 contracts. With each contract containing 5,000 ounces and the price at $25, the silver futures market’s value was over $18.7 billion. The average daily volume in silver futures is around 100,000 contracts, worth $12.5 billion.
- COMEX gold’s open interest was 473,209 contracts. With each contract containing 100 ounces and the price at $2,000, the gold futures market’s value was over $94.64 billion. The average daily volume in gold futures is around 200,000 contracts, worth $40 billion.
Palladium is, by far, the least liquid precious metal, which supports wide price variance and explosive and implosive price moves.
A March bottom leads to a bullish pattern
Nearby palladium futures reached a $1,336 per ounce bottom in March 2023 after falling 60.5% from the March 2022 high.
The nine-month chart shows nearby June palladium futures fell to $1,333, $3 below the continuous contract low on March 9. Over the past few weeks, palladium futures recovered, making higher lows and higher highs, reaching the most recent peak at $1,649 on April 18, a 23.7% increase from the bottom.
Palladium’s low liquidity caused the price to explode to the $3,380.50 level in March 2022 and fall to $1,336 in March 2023. Illiquid markets tend to reach price extremes that can defy reasonable, rational, and logical analysis. On April 2023, June palladium futures traded in a wide $249 per ounce range.
The factors supporting palladium
At just over the $1,500 level on April 27, June palladium futures are in a short-term bullish trend with the following factors supporting a continuation of the rally:
- The annual palladium mine supply is around 210 tons or 6.75 million ounces. Russia produces over 40% of the world’s palladium. Sanctions on Russia and Russian retaliation against “ unfriendly ” countries supporting Ukraine.
As the chart shows, in 2021, North America and Europe consumed 43% of the world’s palladium, which could create supply issues if Russia refuses to supply the metal to the regions.
- Aside from sanctions and the geopolitical turmoil caused by the war in Ukraine, Russia’s Nornickel, the world’s leading palladium producer, forecast a 300,000-ounce deficit in 2023.
- Vantage Market Research forecasts the global palladium market, valued at $16.5 billion in 2022, will reach $24 billion by 2030, at a compound annual growth rate of 5.5% from 2023-2030. Increasing demand for palladium in automotive catalytic converters and a stable rise in the need for palladium jewelry will accelerate market growth.
- Palladium is a green metal as its density and resistance to heat make it a critical input in initiatives addressing climate change.
After the implosive correction from the March 2022 high to the March 2023 low, palladium’s price is positioned to climb. Bull markets rarely move in straight lines as palladium did in early 2022 when the price exploded from below $1,600 in late 2021 to the record $3,380.50 peak in March 2022. Russia’s invasion of Ukraine caused a supply panic that lit an explosive bullish fuse. The next rally will likely experience a far bumpier ride, so buying palladium on pullbacks could be the optimal approach.
PALL is the palladium ETF product
The most direct route for palladium investment is the physical market for bars and coins. The NYMEX futures offer a physical delivery mechanism, ensuring smooth convergence of futures and physical prices during delivery periods.
Meanwhile, the abrdn Physical Palladium ETF ( PALL ) does an excellent job tracking palladium’s price. PALL’s fund summary states:
At $140.45 per share on April 26, PALL had 100% of its $268.93 million assets under management invested in physical palladium bullion.
PALL trades an average of 42,838 shares daily and charges a 0.60% management fee. The continuous palladium futures contract rose from $1,336 in March to $1,639.60 at the April high, a 22.7% increase.
Over the same period, PALL rose from $125.59 to $152.45 per share or 21.4%.
Investing in physical palladium involves safekeeping and insurance costs. Futures require margin and are highly leveraged as a 100-ounce palladium contract worth $150,000 at $1,500 per ounce requires a 14.7% $22,000 original margin deposit. The PALL ETF simplifies the investment process as it is available to market participants in standard stock market portfolios.
Palladium rose to an unsustainable high in March 2022, but the decline to under one-half of that price could be a compelling opportunity for investors to consider, given the fundamental and technical factors that support higher prices over the coming months and years.
For further details see:
PALL: Palladium Finds A Bottom