Commodities: All that glitters isn’t gold

Until recently, palladium—a by-product of other metals such as platinum or nickel used chiefly in the car industry—had a low profile and for good reason. Unloved and overlooked by markets, palladium’s trajectory from 2013 through mid-2018 was uninspiring to say the least, with prices bobbing around the USD 500–900 per ton range.

That all changed in August 2018, the month marking the start of an extraordinary bull run which saw prices soar past those for fellow precious metal gold (which are currently close to USD 1600 per troy ounce) and briefly pierce the USD 2500 per troy ounce mark in January this year before retreating slightly. Investors who bought in before the boom have accumulated over 100% of gains in little over a year.


While the suddenness of palladium’s rise came as a surprise to many, the underlying factors are well-established. Tighter vehicle regulations in China and the EU’s shift from diesel to gasoline and hybrid vehicles—which use more palladium in their catalytic converters—have spurred demand. At the same time, supply has failed to keep pace: The market has been in deficit for years, while the nature of palladium as a by-product makes it more difficult to raise output quickly.

Steven Burke, our commodities economist, also highlights a macroeconomic narrative which was favorable to precious metals more broadly, namely that “the U.S.-China trade war and monetary easing by major central banks around the world spurred demand for safe-haven and non-interest-bearing assets.”

Succinctly summing up the palladium panorama, Rory Johnston, commodity economist at Scotiabank, noted: “This years-long rally is a simple case of robust demand running up against inflexible supply, draining inventories and forcing consumers to pay ever-more for the metal.”


Looking ahead, FocusEconomics panelists expect prices to dip somewhat from their current elevated level by end-2020. Nevertheless, they are still seen remaining extremely high by historical standards and notably higher than gold prices, as current dynamics of solid demand and tight supply continue to play out. Our panelists see prices averaging USD 2,136 per troy ounce in Q4 2020. The minimum price forecast is USD 1,900 per troy ounce, while the maximum price forecast is USD 2,350 per troy ounce. 

As highlighted by economists at ING: “A key pillar behind palladium’s stellar performance over recent years has been the persistent supply deficit and this has widened further. We don’t imagine that’s going to change much in 2020 and we’ll continue to see a sizeable supply deficit.”

Regarding the demand picture, researchers at ANZ project: “Demand from the auto sector will continue to grow by 3% y/y, as stronger loadings offset weaker auto sales.”

That’s not to say palladium is immune to risks. A worsening of the coronavirus outbreak could hit global demand for instance, while vehicle manufacturers could begin to switch palladium for platinum in catalytic converters given platinum is extremely price competitive at present.

That said, analysts at JPMorgan (JPM) argue substitution should not be taken as given: “No widespread  platinum for palladium substitution in gasoline autocatalysts yet. For now, the cost savings don’t outweigh the risks, particularly with electrification on the horizon.”

All in all, the downside risks are unlikely to knock palladium severely off-track, and our panelists have grown increasingly bullish in recent months as the metal has continued to prove the doubters wrong. JPM analysts, for example, state: “We have to conclude that the market will stay susceptible to further episodes of extreme tightness in the medium-term, particularly until the nation-wide launch of China 6 emission targets just after mid-year. While a near-term correction could be due, we have boosted our forecasts”.


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