Setting it apart from its fellow-precious metals, palladium is experiencing a significant rise in 2017. In fact, since January 2016, the metal has risen 59%, a major outperformance. At the same time, palladium ETF-holders, the so-called smart money, have exited in herd-like fashion, -40% over the same period. Normally there is a positive correlation between ETFs price and ownership. Furthermore, we usually see a connection between the prices of all precious metals. When one increases, they usually all do. This has not been the case with palladium lately. What is going on?
Are the fundamentals for palladium so much improved? No, not really. The sale of cars, the main market for palladium, has even decreased in the US and China. On the supply side, there are no clear recent triggers that can explain the steady and strong price increase.
Ever since 2012, less palladium is being produced than demand would warrant. This deficit rises to slightly less than 1 million ounces per year, in a total global market of 9 million ounces. A very significant deficit. It is generally acknowledged that there are two sources of palladium stocks that in the past have filled the gap. First, the Russian stocks of Norilsk and the Russian Central Bank. And secondly, a stock of unknown size in Switzerland. It is now said that both stocks are no longer delivering palladium to the physical market.
What we see now is a huge increase in the so-called lease rates. Precious metals are often leased, so that actual physical purchase does not yet have to take place. This avoids large upfront investments and the need for storage space. The annual cost for this lease is called the lease rate. Such an explosion in the lease rates is extremely unusual. We saw them briefly in the precious metals shortly after the credit crisis. We also saw a mild variant in silver, in 2011, some months before the price of silver went through the roof due to real physical shortages. Some analysts see the explosion in palladium lease rates as a pretext for the overflow of the highly strained palladium market into real physical shortages. In that case, a significant price increase in palladium would be the only logical consequence.