Thomson Reuters GFMS Palladium Outlook for Next Three Months:
Date of Release: 5th April 2013
IMPORTANT NOTE: The following is for informational purposes only and was developed by Thomson Reuters GFMS. It does not take into account the investment objectives, financial situation or particular needs of any particular person. Information is from sources believed to be reliable, but is not guaranteed as to its accuracy or completeness. Opinions and estimates are the judgment of Thomson Reuters GFMS and are subject to change without notice. Distribution of this information does not constitute agreement with, or an endorsement of, the views expressed. Obviously, future outcomes are impossible to predict with certainty. Investors should obtain advice based on their own individual circumstances and understand the risks before making any investment decisions.
After opening March at $721, palladium posted strong gains in the first half of the month. Much of the metal’s strength came from a secular increase in speculative long positions in the futures market in response to increasing fears that the South African mining industry could be hit by further labour unrest. Moreover, strong buy-side interest was supported by the metal’s favourable underlying fundamentals. These factors saw palladium prices hit the high for the month of $774 on the 15th, which was also the highest level since September 2011. Palladium was pulled lower along with platinum in the following days, although the former proved to be more resilient, supported by positive news from the vehicle market in the United States and China. Palladium then quickly recovered and continued to rally for the rest of March, closing the month at $770. The metal’s strength towards the month-end was attributed to the news that Russia and South Africa were considering to set-up an OPEC- type trading partnership for the PGMs market. It is of note that palladium significantly outperformed its sister metal in March, recording a 7% intra-month gain, while platinum remained broadly flat.
With regard to the forecast, we remain generally bullish towards palladium over the next three months. We would, however, caution that further weakness in the palladium price is possible in the short term, given cautious sentiment towards the precious metals complex. It is, nevertheless, worth stressing that the downside risk should remain fairly limited, especially following the recent sizeable sell-off in early April. As such, after the metal goes through a period of consolidation in the low-to-mid $700s, a healthy recovery is set to gather pace in late April, driven by any further developments on the platinum supply side.
Looking further ahead, we expect palladium to move steadily higher, with a distinct possibility that the price could exceed $800 before July. Palladium should benefit from a gradual recovery in gold and platinum prices, with strong support coming from its positive supply/demand outlook. More specifically, palladium is the only precious metal to record a fundamental deficit in 2013. Moreover, autocatalyst demand for palladium is set to post a record high level this year, thanks to robust gasoline-dominated auto sales, especially in the United States and China, along with continued substitution gains in diesel applications at the expense of platinum.
Having said that, it is worth stressing that the price rally could be accompanied by heightened volatility, particularly given significantly higher net longs on Nymex at the time of writing. As price targets are met, we would not be surprised that short-term investors will be keen to lock in profits, which could be see palladium ease back towards mid-$700s after a spike to over $800 in June.
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