Palladium futures on Thursday climbed past $1,100 an ounce for the first time on record, leaving some traders to wonder whether palladium has the ability to continue its rally and surpass the value of gold.
On Thursday, March palladium PAH8, -0.67% traded up $11.20, or 1%, at $1,094.55 an ounce after touching a high of $1,101.70. Futures prices hit an intraday record and were poised for the highest settlement based on record dating back to 1984, according to FactSet data.
"Palladium is hitting new record nominal highs due to the perfect storm of very robust demand and small, finite supply of physical palladium bullion," said Mark O'Byrne, research director Dublin-based GoldCore.
Palladium's latest moves aren't a big surprise, given that the precious and industrial metal last year hit its highest levels since early 2001.
With global supplies expected to grow "only marginally" and "firm prospects for growth in autocatalyst demand" for palladium, a deficit for the metal was expected to widen to 800,000 ounces in 2017, according to a report from Johnson Matthey released in May 2017. Palladium is used in the pollution-control catalytic converters on gasoline-powered vehicles.
"The majority of the world's palladium supply-over 80% by some estimates-are found in just one country, Russia," O'Byrne said. "This in itself could complicate matters when it comes to supply."
"Russia has restricted supplies of valuable and strategic natural resources, such as natural gas, in the past and geopolitical tensions and resource nationalism could see it do so again," he said. "This would lead to much higher prices in a very small, finite physical market that is already in deficit."
Eyeing gold's priceOn Thursday at its peak, palladium futures traded just a couple hundred dollars below the price of gold futures. February gold GCG8, -0.10% traded at 1,320.50 an ounce.
'Given the size of the physical deficits it is possible that palladium could surpass gold's price in the coming months.'Mark O'Byrne, GoldCoreGCG8, -0.10%"Given the size of the physical deficits it is possible that palladium could surpass gold's price in the coming months," said O'Byrne.
Brien Lundin, editor of Gold Newsletter, also agreed that could happen. Emphasizing that palladium is much more of an industrial than precious metal than gold, he said there is "really no fundamental relationship between gold and palladium that would prevent or even hinder it in potentially surpassing gold's value."
Palladium is driven by supply and demand fundamentals that are "entirely divorced from the primary fundamentals that would drive gold," and as long as demand for palladium's uses, mostly in catalytic converters, "is outstripping supplies, the price will continue its upslope in complete immunity to gold's fortunes."
Fuel for the rallyWhether palladium is able to surpass the dollar-per-ounce price of gold would obviously depend on whether it can continue its rally and while its supply deficit is poised to grow, futures prices already tallied a more than 55% rise last year.
"Palladium still has room to run, but the higher the price rises, the greater the risk of substitution," said Maxwell Gold, director of investment strategy at ETF Securities.
"Autocatalyst demand accounts for over three-quarters of palladium demand," he said. "If these prices remain elevated and continue to rise in the medium to longer term, automotive producers may begin to seek cost-cutting and replace or mix palladium with other metals such as platinum and rhodium."
Meanwhile, O'Byrne pointed out that platinum group metals are "more volatile than gold and therefore merit a lesser allocation of one's wealth."
So for now, he said he would advocate "a strategy of reweighting and rebalancing precious metals when they outperform."