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General Market Commentary
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General Precious Metals
Can coronavirus pandemic tame the wild palladium market?: Andy Home
LONDON, April 20 (Reuters) - COVID-19 has roiled industrial metal markets with lockdowns around the world eviscerating demand, forcing mine closures and upending supply chains.
It’s been a wild ride for the likes of copper, aluminium and zinc, all of which have plunged to multi-year lows.
So too for the precious metals complex with gold slumping in early March before rocketing to seven-year highs earlier this month as investors sought shelter from the macro storms.
Palladium, however, was a wild market before anyone had ever heard of the novel coronavirus. The spot price exploded from less than $800 per ounce in August 2018 to $2,875.50 in February this year.
Lease rates in the London inter-dealer market flexed to extreme levels in January-February, prompting Russian producer Nornickel to commit three tonnes from its “Global Palladium Fund” stocks to try and calm things down.
The metallic demand shock caused by collapsing automotive production and sales has been a core driver of the metals price volatility. In the case of palladium, though, it may just have the opposite effect.
But don’t hold your breath.
ANIMAL SPIRITS EXTINGUISHED
Palladium has all the hallmarks of a speculative bubble, the unleashing of what John Maynard Keynes famously termed the market’s animal spirits.
However, every indication is that the speculative beasts have largely fled a metal that is too hot to handle.
The fund long position on the NYMEX palladium contract peaked at close to 29,000 contracts in January 2018. As of last week it stood at just 1,835.
Palladium exchange-traded funds boomed in the early part of the last decade, reaching a cumulative holding of 3.03 million ounces in 2015. Holdings have since fallen by around 80% to 660,000 ounces, according to David Wilson, head of investment research at the World Platinum Investment Council (WPIC). (“Palladium: An introduction for Investors”, March 2020)
It is quite possible that larger players built up speculative stocks away from the statistical glare of both the futures and the London dealer markets.
However, if they did so, those stocks are almost certainly lower than they were just a month ago.
Gold, silver, platinum and palladium prices all swooned in March in a collective slump widely attributed to banks liquidating physical holdings to meet margin calls in collapsing equities.
Palladium imploded from February’s highs to a low of $1,482 per ounce before staging a ferocious recovery. It is today trading around $2,180.
The buyers behind the whiplash rebound were not other speculators but rather Chinese automotive companies desperate to acquire metal, according to the WPIC’s Wilson.
Western car-companies have long-dated hedging programmes to reduce their materials price risk. Chinese companies don’t, meaning the sort of sell-off seen last month was a golden opportunity to grab what they could at bargain-basement prices.