One of the least well-known precious metals continues to shine brightly this year - palladium.
The Federal Reserve released its Open Market Committee minutes last Wednesday, which highlighted differences of opinion among the 19 policymakers at the Federal Reserve about how long the unlimited quantitative easing program will continue. What did they say? "A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the (policy-setting) committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred." With this potential removal of liquidity from the markets at some point in the future, perhaps as early as the end of 2013, the precious metal sectors were hit hard. Gold spot fell almost $50 dollars on an intra-day basis before recovering slightly at the end of the day. The silver spot price fell almost $1.30 over the same time period. Despite this disagreement between policy makers, the central bank continues to purchase $85 billion in bonds every month and maintain a zero-percent interest rate policy.
We like to look at the largest precious metals ETF's to gauge investor sentiment on this type of correction and last week we spotted an interesting divergence. Using data from Bloomberg, one can see a substantial drop in outstanding shares of the largest gold ETFs, but no drop in the outstanding shares of the largest silver, platinum nor palladium ETFs. So despite the negative price action in the precious metals space, these 'white-metals' investors are holding tight. In fact, when one looks deeper into the palladium market, the increase in investor participation has been substantial.
To truly understand how investors have taken to palladium, some market figures will be helpful for context. According to Johnson Matthey, total palladium supply in 2012 was 6,570,000 ounces and investor demand was 385,000 ounces or about 5% of the market. So investors have historically not been big participants in this market.
Looking forward, for 2013 the analysts we follow have forecasted investor demand between 100,000 and 500,000 ounces. So how are these predictions faring? So far in 2013 the palladium ETF's have already purchased 311,442 ounces of palladium, which puts them well on track to exceed last year's investments. If this pace continues, the impact on the market could be substantial. The other statistic that is helpful to gauge interest is futures volume. And this is where we see record activity. Aggregate open interest in palladium has exploded to represent 3,861,800 ounces or well over half of the total palladium market. Now, it remains to be seen if investors will take delivery of these ounces, but if even a fraction of investors take delivery it could have a material impact on the price of palladium.
Given all these new buyers entering the market, what could happen to the price? Palladium price forecasts are as high as $975 for Q4 2013, according to analysts surveyed by Bloomberg. And remember these price targets are using investor demand estimates for 2013 that are well on track to be surpassed! So it stands to reason that if investors start adding palladium to their precious metals portfolios the price could move substantially higher.
Despite the drubbing precious metals took last week, investor sentiment for the 'white-metals' appears to be strong. Palladium is already the top performing precious metal this year returning close to 5% and, based on investor activity, its future looks bright.
dfranklin@sprott.com
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