(Kitco News) - Palladium futures hit their highest level since 2011 on Monday as heightened geopolitical tensions surrounding Russia and Ukraine have exacerbated supply worries at a time when a major strike is occurring in South Africa.
Some analysts look for further gains over the longer term, while others described themselves as constructive but offered caution with so much bullish news already factored into prices.
As of 10:37 a.m. EDT, palladium for June delivery was $9.20, or 1.1%, higher to $816 per ounce on the New York Mercantile Exchange. It traded as high as $817, which is the strongest level since August 2011 on a futures continuation chart. Sister metal July platinum was up $7.70, or 0.5%, to $1,470.30 an ounce.
The news flow boosting prices is largely the same as in recent weeks – the Ukraine-Russia geopolitical crisis and strikes in South Africa -- but the metal keeps stair-stepping higher as both news stories continue to play out.
“It’s worries about the supply side,” said one North American trader. He said the premium on sponge, which is metal in a powder form used for industrial purposes, is up to around $12 an ounce for palladium and around $4 to $5 an ounce for platinum.
Pro-Russian protestors are still occupying government buildings in eastern Ukraine after a government deadline passed for the demonstrators to leave. The world is watching to see what the Ukrainian and Russian governments do next in the aftermath of Russia’s annexation of the Crimean region of Ukraine.
The potential for further Russian involvement adds to worries about potential Western trade and economic sanctions against Russia, which is the world’s largest palladium producer.
“It’s such an unknown and it creates uncertainty,” said Bill O’Neill, one of the principals with LOGIC Advisors. “I see no evidence of any kind of supply interruption (from Russia) at this point, but that’s the fear the market has.”
In particular, traders wonder if Russia’s
“This (palladium) is a market already in a fairly large (supply) deficit, and this just makes it worse,” Melek said.
The Russian worries come during a lengthy disruption of supplies of platinum group metals as a result of a strike by the Association of Mineworkers and Construction Union against three major producers in South Africa. The labor action began in late January.
The Russian and South African concerns caused an outsized move on a small market such as palladium since most of the world’s metal come from just two countries, O’Neill pointed out. According to the
Goldman Sachs, in a report released Sunday, said Western nations may be most likely to impose sanctions against Russian exports of metals that make up a small portion of the global supply, such as copper and aluminum. However, the bank also said there is potential for Russia to withhold metals such as palladium in “counter sanctions,” since it commands so much of the world’s supply of a metal essential to the global auto market due to its use in catalytic converters.
The bullish news flow comes after two palladium-backed exchange-traded funds were launched in South Africa this spring, taking more metal off of the open market. The ETFs trade like stocks but are backed by palladium put into storage. The two ETFs had inflows of some 270,000 ounces, or 7.6 metric tons, during their first two weeks, according to a morning metals report from TDS.
TD Securities forecasts a 2014 palladium supply deficit of 1.6 million ounces. Earlier this month, HSBC forecast a supply deficit of 959,000 ounces.
Related Stories:
- Goldman Reiterates $1,050/Oz Gold Call, Sees Potential For PGM Supply Disruptions
- HSBC Maintains Bullish Forecasts For Platinum Group Metals
- CIBC Remains Bullish On PGMs Despite Risk of Selloff On Profit Taking
More Price Gains Seen But Some Favor Buying On Pullbacks
Many analysts see further price gains. Melek said he sees longer-term strength even if the Ukraine-Russia crisis quiets down, particularly if the U.S. economy continues to improve. A report Monday morning showed U.S. retail sales jumped 1.1% last month for the biggest gain since September 2012. Auto sales jumped 3.1%.
Melek listed a TDS average price forecast of $825 an ounce for palladium in the third quarter and $850 for the fourth. HSBC, in its most recent forecast released on April 3, forecast an average 2014 price of $825, then $900 next year.
O’Neill said he considers the supply/demand fundamentals for both platinum and palladium to be strong, but nevertheless offered some caution about the upside in palladium from current prices.
“I like the market in general,” he said. “But at these levels, it (further price gains) is dependent on having continued problems….I think the way to trade the market is to buy weakness.
“Buying spikes is dangerous in any market and certainly this. But buying weakness is the way to go.”
One potential complication would be if gold were to go suddenly sell off, he pointed out. The yellow metal is the bellwether for the precious complex and often pulls the others with it on sympathy selling and buying.
One way to trade the uncertainty, O’Neill continued, would be to establish a spread position in which a trader buys platinum and sells gold in equal amounts. Then if say both were to decline but platinum by a less amount, the trader would still be left with a profit.
Read the latest news in gold and precious metals markets at Kitco News.
By Allen Sykora of Kitco News; asykora@kitco.com
