Palladium Steadies With UBS Flagging ‘Sweet Spot’ for Hot Metal

(Bloomberg) --

Palladium steadied after a record-breaking rally, with investors considering whether the metal has risen too high, too fast.

Prices swung between gains and losses on Monday, after surging to a fresh record of $2,577.27 an ounce as tight supply conditions show little sign of easing. The metal pared some of its gains in the afternoon as a holiday in the U.S. depressed activity in most major markets.

Palladium’s recent jump left some investors worried that a price pullback is due. Still, overall sentiment remains bullish.

The metal is in a “real sweet spot” of recovering industrial production globally, higher purchases from the auto sector, and constrained mine supply, said Wayne Gordon, executive director for commodities and foreign exchange at UBS Global Wealth Management.

“Setbacks after these sort of rallies, given the very thin nature of volumes in the market, isn’t that surprising,” Gordon said. “If industrial production surprises to the upside, and so does autos’ demand, well, then palladium can get a heck of a lot tighter.”

Palladium Steadies With UBS Flagging ‘Sweet Spot’ for Hot Metal

Spot palladium was steady at $2,492.69 an ounce at 3:43 p.m. in London, paring this year’s gain to 28%. Platinum dropped as much as 1.2%, but still held above $1,000 an ounce, while gold and silver were little changed.

Palladium’s surge is rooted in positive fundamentals, with production trailing demand as stricter emissions standards boost consumption by carmakers. Uncertain power supply in South Africa also threatens to curtail operations.

Producers also lack the capacity to boost output easily in response to price increases because palladium is largely mined as a byproduct. The cost to borrow palladium has jumped to the highest in over a year.

“Palladium’s particularly strong fundamentals suggest that it can continue to trade far beyond cost dynamics,” TD Securities said in a note. “We see a smaller risk for a sharp decline in prices.”

Palladium Steadies With UBS Flagging ‘Sweet Spot’ for Hot Metal

Palladium’s technicals meanwhile are stretched, with the 14-day relative strength index topping 90 for a second day. A number above 70 signals to some traders that an asset may be overbought, although palladium has held above that level for two weeks without a pullback.

The metal has been surging together with U.S. equities as there’s still some spare liquidity in the market, while investors are searching for assets whose fundamentals guarantee high returns, said Gianclaudio Torlizzi, managing director of consultancy T-Commodity Srl A Socio Unico. FOMO, or the fear of missing out, is adding fuel to the fire. “Or better to say TINA -- there is no alternative,” he said.

The U.S. stock market has showed some signs of exhaustion so a setback is possible -- in equities and in palladium -- although it’s hard to say how big it could be, Torlizzi said.

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