
Palladium leaves gold in its dust

Ole Hansen
Head of Commodity Strategy
Summary: The uptrend in gold that was established after hitting a low point in August has so far been prevented from extending further beyond $1,240/oz while palladium prices have entered a pronounced rally.
The 33% collapse in crude oil prices since early October has helped remove some of the inflationary pressure and with that, the need for much higher US short-term rates. Last week, Federal Reserve chair Jerome Powell said that the Fed is getting closer to what it perceives as being a neutral rate, i.e. not too tight and not too easy.
The reaction to this has been a continued reduction in the market's expectation for future rate hikes. The chart below shows how the 30-day Fed Funds futures curve has shifted lower by a full rate move during the past month.
The two- to 10-year spread, which is the most closely watched as a potential indicator of an emerging recession, has flattened to just 12 basis points, primarily driven by a drop in US 10-year yields to 2.91%, a three-month low. Finally, the weaker dollar seen against the Chinese yuan following the weekend meeting in Buenos Aires between Trump and China’s Xi Jinping has provided an additional source of support, particularly given the high correlation seen between gold and yuan in recent months.
Hedge funds held a net-short of 52,000 lots in the week to November and reversing that back to a long position, outside market developments permitting, could help trigger an extension towards the next levels of resistance at $1,262/oz. and potentially as high as $1,286/oz.
In order to understand this development, we need to take a look at its sister metal: platinum. Both metals are used in catalytic converters to reduced the emission of harmful gases from cars and trucks. While platinum is best used in diesel engines, palladium is the preferred metal in gasoline engines. Demand for palladium rising strongly as consumers turn away from diesel towards gasoline-powered cars.
With palladium already in scarce supply, the combination of strong physical and speculative demand has so far taken it higher by 14% year-to-date, this on top of a 60% rise last year. Next year the physical market is expected to be even tighter than 2018 with a supply being steady while demand from the automotive sector will continue to grow.
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