Palladium stars as investors focus on future substitution

Standard Bank says in a report that both the palladium price and ETFs has surged as investors have focused on its substitution value. Palladium is set to enter the $650-$685 target zone.

JOHANNESBURG - 

Palladium was the star performer among platinum group metals (PGMs) in February as investors focused on future substitution gains from the metal, especially in the automotive sector.

Palladium's two Exchange Traded Funds (ETFs) experienced another surge, with total holdings growing by just under 200,000 ounces in February. The price rose by 41% to close the month at $568, said Standard Bank in a monthly report.

The bank said the driving factor was not constrained palladium supply in South Africa, as above ground stocks exceeded one year of fabrication demand, but rather a realisation of what "the future might hold" in terms of substitution for platinum in autocatalysts.

Sentiment towards this platinum group metal was strong as even investors in Japan turned to palladium. In addition, shares of North American Palladium and Stillwater Mining, both biased towards palladium production, respectively rose by 120% and 153% since interest in the metal recurred at the end of January.

In Nymex palladium futures, net long positions remained "elevated" at 1.36m ounces as of 26 February and are believed to have gained further ground since, said the report.

Platinum ETFs also grew in February, with ETF security holdings rising by over 132,000 ounces to about 300,000 ounces and total holdings increasing by over 50% from the end of January.

The report said an "impressive wave of funds" had moved into the metal's two ETFs since last November and the funds saw a further increase in February.

However, the trend in positions in Nymex platinum futures was an "atypical near inverse relationship to the price", with net longs declining by almost 270,000 ounces (or 36%) from their recent peak in January.

The report said this was suggestive of Nymex speculators taking profits in February, in part selling into strong demand from ETF investors.

Platinum Technical Analysis

Standard Bank advised reduced long positions in platinum as the "bull trend" has reached the $2,150 level and there were currently no further upside projections. (Although the metal price is now around $100 higher than this level.)

The report said the move off the $2,192 high was threatening the sustainability of the bull trend from a near term perspective and the bank now took a mildly bearish view.

A price decline to $2,090 would prove the catalyst to breach the $2,065 level, targeting $1,990.

"Trading from the short side is preferred as there is potential for the anticipated sell-off at the $1,925 level. Platinum is expected to establish a support base between $1,990 and $1,925."

Renewed strength in the price, beyond $2,166, before it breaks below $2,065 would alleviate the bearish near-term scenario.

"Additional support levels are at $1,882 and levels of $1,754 to $1,700 provide important downside protection."

The report said the primary bull trend prevailed, but some form of "corrective activity' was required to assist with longer-term forecasting.

Palladium Technical Analysis

Standard Bank said palladium was set to enter the $650 to $685 target zone as the removal of resistance around $400 signalled a medium-term reversal in trend.

"There is not a great deal of resistance between current levels and $650, as the bear trend from 2001 to 2003 did not establish many corrective peaks. A previous support level may provide a barrier at $565, so some caution is advised on approach of this level."

Initial support levels were at $532 and $50, with $650 to $685 levels seen as the "minimum target zone". There was currently no firm "objectives" beyond $685, with $730 and $765 the potential resistance points.

"However, we advise reducing long positions once $650 to $685 is reached.

"Palladium weakness below the $503 to $470 support level will delay the bull trend, with a decline through $400 implying the market has reached a ‘top'."

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