COMMODITIES 6 minutes to read

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.


Gold has remained rangebound for the past five months, but prices are once again testing resistance as some of the underlying drivers have provided renewed support. Palladium, meanwhile, has raced higher on a surging combination of strong physical and speculative demand. 

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.
Enlarge
Source: Saxo Bank
Additional support for gold has emerged through the renewed strength in bonds and not least the accelerated flattening of the yield curve – something that in the past has signaled increased risk of an economic slowdown in the US.

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. 
Enlarge
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. This is due in major point to a continued bearish stance from hedge funds who have maintained a net-short since July. At this stage, the $1,240/oz area is being defended but given the aforementioned changes we see an increased risk of a breakout to the upside.

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.
Enlarge
Source: Saxo Bank
While gold has been languishing, the minor metal of palladium has broken all shackles and continued to surge higher on a combination of robust fundamentals and strong price momentum. After testing parity to gold on Tuesday it has surged higher today and now trades at a premium to gold for the first time in 16 years. 

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. 
Enlarge
Source: Saxo Bank

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)